UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 000-50404
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LKQ CORPORATION
(Exact name of registrant as specified in its charter)
________________________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
500 West Madison Street, Suite 2800,
Chicago, Illinois
(Address of principal executive offices)
36-4215970
(I.R.S. Employer
Identification Number)
60661
(Zip Code)
Registrant’s telephone number, including area code: (312) 621-1950
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $.01 per share
Trading Symbol(s)
LKQ
Securities registered pursuant to Section 12(g) of the Act: None
________________________________________
Name of each exchange on which registered
NASDAQ Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
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.
Large accelerated filer
Non-accelerated filer
Emerging growth company
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Accelerated filer
Smaller reporting company
☐
☐
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 Act). Yes ☐ No ☒
As of June 30, 2019, the aggregate market value of common stock outstanding held by stockholders who were not affiliates (as defined by regulations of the Securities and
Exchange Commission) of the registrant was approximately $8.2 billion (based on the closing sale price on the NASDAQ Global Select Market on such date). The number of
outstanding shares of the registrant's common stock as of February 21, 2020 was 307,148,085.
Those sections or portions of the registrant's proxy statement for the Annual Meeting of Stockholders to be held on May 12, 2020, described in Part III hereof, are
incorporated by reference in this report.
Documents Incorporated by Reference
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
PART I
Statements and information in this Annual Report on Form 10-K 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 including
those identified below. 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 the following (not necessarily in order of importance):
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changes in economic, political and social conditions in the U.S. and other countries in which we are located or do business, including the U.K. withdrawal
from the European Union (also known as Brexit), and the impact of these changes on our businesses, the demand for our products and our ability to obtain
financing for operations;
increasing competition in the automotive parts industry (including parts sold on online marketplaces and the potential competitive advantage to original
equipment manufacturers ("OEMs") with "connected car" technology);
fluctuations in the pricing of new OEM replacement products;
changes in the level of acceptance and promotion of alternative automotive parts by insurance companies and vehicle repairers;
changes to our business relationships with insurance companies or changes by insurance companies to their business practices relating to the use of our
products;
our ability to identify acquisition candidates at reasonable prices and our ability to successfully divest underperforming businesses;
our ability to integrate, realize expected synergies, and successfully operate acquired companies and any companies acquired in the future, and the risks
associated with these companies;
the implementation of a border tax or tariff on imports and the negative impact on our business due to the amount of inventory we import;
restrictions or prohibitions on selling certain aftermarket products through enforcement by OEMs or government agencies of intellectual property rights;
restrictions or prohibitions on importing certain aftermarket products by border enforcement agencies based on, among other things, intellectual property
infringement claims;
variations in the number of vehicles manufactured and sold, vehicle accident rates, miles driven, and the age profile of vehicles in accidents;
the increase of accident avoidance systems being installed in vehicles;
the potential loss of sales of certain mechanical parts due to the rise of electric vehicle sales;
fluctuations in the prices of fuel, scrap metal and other commodities;
changes in laws or regulations affecting our business;
higher costs and the resulting potential inability to service our customers to the extent that our suppliers decide to discontinue business relationships with
us;
price increases, interruptions or disruptions to the supply of vehicle parts from aftermarket suppliers and vehicles from salvage auctions;
changes in the demand for our products and the supply of our inventory due to severity of weather and seasonality of weather patterns;
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the risks associated with operating in foreign jurisdictions, including foreign laws and economic and political instabilities;
declines in the values of our assets;
additional unionization efforts, new collective bargaining agreements, and work stoppages;
our ability to develop and implement the operational and financial systems needed to manage our operations;
interruptions, outages or breaches of our operational systems, security systems, or infrastructure as a result of attacks on, or malfunctions of, our systems;
costs of complying with laws relating to the security of personal information;
product liability claims by the end users of our products or claims by other parties who we have promised to indemnify for product liability matters;
costs associated with recalls of the products we sell;
potential losses of our right to operate at key locations if we are not able to negotiate lease renewals;
inaccuracies in the data relating to our industry published by independent sources upon which we rely;
currency fluctuations in the U.S. dollar, pound sterling and euro versus other currencies;
our ability to obtain financing on acceptable terms to finance our growth;
our ability to satisfy our debt obligations and to operate within the limitations imposed by financing arrangements;
changes to applicable U.S. and foreign tax laws, changes to interpretations of tax laws, and changes in our mix of earnings among the jurisdictions in
which we operate; and
disruptions to the management and operations of our business and the uncertainties caused by activist investors.
Other matters set forth in this Annual Report may also cause our actual results to differ materially from our forward-looking statements, including the risk
factors disclosed in Item 1A of this Annual Report.
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website (www.lkqcorp.com) as soon
as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission.
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ITEM 1. BUSINESS
OVERVIEW
LKQ Corporation ("LKQ" or the "Company") is 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 original equipment
manufacturers ("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 the United Kingdom, Germany, the Benelux region (Belgium, Netherlands, and Luxembourg), Italy, Czech Republic,
Poland, Slovakia, Austria, 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. We aggregate our Wholesale - North
America and Self Service operating segments into one reportable segment, North America, resulting in three reportable segments: North America, Europe and
Specialty. See Note 16, "Segment and Geographic Information" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for
financial information by reportable segment and by geographic region.
HISTORY
We were initially formed in 1998 through the combination of a number of wholesale recycled products businesses and subsequently expanded through
internal development and acquisitions of aftermarket, recycled, refurbished, and remanufactured product suppliers and manufacturers; self service retail businesses;
and specialty vehicle aftermarket equipment and accessories suppliers. We have completed approximately 280 business acquisitions. Our most significant
acquisitions include:
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2007 acquisition of Keystone Automotive Industries, Inc., which, at the time of acquisition, was the leading domestic distributor of aftermarket products,
including collision replacement products, paint products, refurbished steel bumpers, bumper covers and alloy wheels.
2011 acquisition of Euro Car Parts Holdings Limited ("ECP"), a vehicle mechanical aftermarket parts distribution company operating in the United
Kingdom. This acquisition served as our entry into the European automotive aftermarket business, from which we have expanded our European footprint
through organic growth and subsequent acquisitions.
2013 acquisition of Sator Beheer B.V. ("Sator", now known as Fource), a vehicle mechanical aftermarket parts distribution company based in the
Netherlands, with operations in the Netherlands, Belgium and Northern France. This acquisition allowed us to further expand our geographic presence
into continental Europe.
2014 acquisition of Keystone Automotive Holdings, Inc. (“Keystone Specialty”), which expanded our product offering and increased our addressable
market to include specialty vehicle aftermarket equipment and accessories.
2016 acquisition of Rhiag-Inter Auto Parts Italia S.r.l. (“Rhiag”), a distributor of aftermarket spare parts for passenger cars and commercial vehicles in
Italy, Czech Republic, Slovakia, Switzerland, Hungary, Romania, Ukraine, Bulgaria, Poland and Spain. This acquisition expanded our geographic
presence in continental Europe.
2018 acquisition of Stahlgruber GmbH (“Stahlgruber”), a wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and
accessories with operations in Germany, Austria, Italy, Slovenia, and Croatia, with further sales to Switzerland. This acquisition expanded our geographic
presence in continental Europe and serves as an additional strategic hub for our European operations.
Further information regarding our recent acquisitions is included in Note 2, "Business Combinations" to the consolidated financial statements in Part II,
Item 8 of this Annual Report on Form 10-K.
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STRATEGY
Our mission is to be the leading global value-added distributor of vehicle parts and accessories by offering our customers the most comprehensive,
available and cost-effective selection of part solutions while building strong partnerships with our employees and the communities in which we operate.
We have four primary strategic pillars to build economic value: growth through diversified product offerings; growth through geographic expansion;
adaptation to evolving technology; and rationalization of our asset base to enhance margins and return on capital. We believe our supply network, with a broad
inventory of quality alternative collision and mechanical repair products and specialty vehicle aftermarket products, high fulfillment rates, and superior customer
service, provides us with a competitive advantage. To execute our strategy, we are focused on a number of key areas, including:
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Extensive distribution network. We have invested significant capital to develop a network of alternative and specialty vehicle parts facilities across our
operating segments. Additionally, our ability to move inventory throughout our distribution networks increases the availability of our products and helps
us to fill a relatively high percentage of our customers’ requests. In order to expand our distribution network, we will continue to seek to enter new
markets and to improve penetration through both organic development and acquisitions. We will continue to seek opportunities to leverage the
distribution network by delivering more parts through our existing network. We believe our North America segment has the largest distribution network
of alternative vehicle parts and accessories for the automotive collision repair market in North America. In our Europe segment, we are implementing a
similar strategy to our North America operations by establishing a Pan-European distribution network. We currently have operations in over 20 different
European countries, which we believe represents the broadest and largest footprint in the aftermarket industry in Europe. On a global basis, we operate
approximately 1,700 facilities as part of our distribution network.
Broad product offering. The breadth and depth of our inventory across all of our operating segments reinforces our ability to provide a “one-stop”
solution for our customers’ alternative vehicle replacement, maintenance, and specialty vehicle product needs.
High fulfillment rates. We manage local inventory levels to improve delivery and maximize customer service. Improving local order fulfillment rates
reduces transfer costs and delivery times, and improves customer satisfaction.
Strong business relationships. We have developed business relationships with key constituents, including customers, automobile insurance companies,
suppliers and other industry participants in North America, Europe, and Asia.
Acquisitions. The primary objective of our acquisitions is to expand our presence to new or adjacent geographic markets and to expand into other product
lines and businesses that may benefit from our operating strengths, in each case with the aim of increasing the size of our addressable market. After
completing an acquisition, we focus on integrating the company with our existing business to provide additional value to the combined entity through cost
savings and synergies, such as logistics cost synergies resulting from integration with our existing distribution network, administrative cost savings,
shared procurement, and cross-selling opportunities.
Technology driven business processes. We focus on technology development to support our competitive advantage. We have built advanced data
analytics capabilities and data assets and believe that we can more cost effectively leverage our data to make better business decisions than our smaller
competitors.
Adaptation to evolving technology in the automotive industry. We are committed to monitoring and adapting our business to the technological changes in
the automotive industry. We have a forward-looking strategy and innovation team that helps us assess the potential opportunities and risks associated with
several areas including, but not limited to, e-commerce, accident avoidance systems, vehicle connectivity, autonomous vehicles, electric vehicles and
ride-sharing trends.
Rationalized asset base. We have a portfolio review process and are continually analyzing and executing initiatives to reduce our operating costs and
drive efficiencies.
NORTH AMERICA SEGMENT
Our North America segment is composed of wholesale operations, which consists of aftermarket and salvage operations, and self service retail operations.
During 2019, we acquired two diagnostic and repair services businesses.
Wholesale Operations
Inventory
Our wholesale operations in North America sell five product types (aftermarket, OEM recycled, OEM remanufactured, OEM refurbished and, to a lesser
extent, new OEM parts) to professional collision and mechanical automobile
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repair businesses. Our principal aftermarket product types consist of those most frequently damaged in collisions, including bumper covers, automotive body
panels, lights and automotive glass products such as windshields. Platinum Plus is our exclusive product line offered under the Keystone brand of aftermarket
products. Certain of our products are certified by an independent organization, the Certified Automotive Parts Association (“CAPA”). CAPA is an association that
evaluates the quality of aftermarket collision replacement products compared to OEM collision replacement products. We also developed a product line called
"Value Line" for more value conscious, often self-pay, consumers. Our salvage products include both mechanical and collision parts, including engines;
transmissions; door assemblies; sheet metal products such as trunk lids, fenders and hoods; lights; and bumper assemblies.
The aftermarket products we distribute are purchased from independent manufacturers and distributors located primarily in North America and Asia,
principally Taiwan. In 2019, approximately 38% of our aftermarket purchases were made from our top 4 vendors, with our largest vendor providing approximately
16% of our annual inventory purchases. We believe we are one of the largest customers of each of these suppliers. Outside of this group, no other supplier provided
more than 5% of our supply of aftermarket products in 2019. We purchased approximately 49% of our aftermarket products in 2019 directly from manufacturers in
Taiwan and other Asian countries. Approximately 48% of our aftermarket products were purchased from vendors located in the U.S.; however, we believe the
majority of these products were manufactured in Taiwan, Mexico or other foreign countries.
Within our wholesale operations, we focus our procurement on products that are in the most demand, based on a number of factors such as historical sales
records of vehicles by model and year, customer requests, and projections of future supply and demand trends. Because lead times may be 40 days or more on
imported aftermarket products, sales volumes and in-stock inventory are important factors in the procurement process.
We procure recycled products for our wholesale operations by acquiring total loss vehicles, typically sold at regional salvage auctions, and then
dismantling and inventorying the parts. The availability and pricing of the salvage vehicles we procure for our wholesale recycled products operations may be
impacted by a variety of factors, including the production level of new vehicles and the percentage of damaged vehicles declared total losses. Our bidding
specialists are equipped with a proprietary software application that allows them to compare the vehicles at salvage auctions against our current inventory levels,
historical demand, and recent average selling prices to arrive at an estimated maximum bid.
Information Technology Systems
In our aftermarket operations, we use a third party enterprise management system and other third party software packages to leverage the centralized data
and information that a single system provides, such as a data warehouse to conduct enhanced analytics and reporting, an integrated budgeting system, an electronic
data interchange tool, and E-commerce tools to enhance our online business-to-business initiatives - OrderKeystone.com and Keyless.
Our wholesale recycled product locations in North America operate an internally-developed, proprietary enterprise management system called LKQX.
We believe that the use of a single system across all of our wholesale recycled product operations helps facilitate the sales process; allows for continued
implementation of standard operating procedures; and improves training efficiency, employee transferability, access to our national inventory database,
management reporting and data storage. The system also supports an electronic exchange process for identifying and locating parts at other select recyclers and
facilitates brokered sales to fill customer orders for items not in stock.
Scrap and Other Materials
Our salvage operations generate scrap metal and other materials that we sell to metals recyclers. Vehicles that have been dismantled for recycled products
and "crush only" end-of-life vehicles acquired from other companies are typically crushed using equipment on site. In other cases, we will hire mobile crushing
equipment to crush the vehicles before they are transported to shredders and scrap metal processors. Damaged and unusable wheel cores are melted in our
aluminum furnace and sold to consumers of aluminum ingot and sow for the production of various automotive products, including wheels. We also extract and sell
the precious metals contained in certain of our recycled parts such as catalytic converters.
Customers
We sell our products to wholesale customers that include collision and mechanical repair shops and new and used car dealerships, as well as to retail
customers. The majority of these customers tend to be individually-owned small businesses, although the number of independent and dealer-operated collision
repair facilities has declined over the last decade, as regional or national multiple-location operators have increased their geographic presence through
consolidation.
Automobile insurance companies affect the demand for our collision products; while insurance companies do not pay for our products directly, they
ultimately pay for the repair costs of insured vehicles in excess of any deductible amount. As a result, insurance companies often influence the types of products
used in a repair. The use of our alternative products instead of new OEM products provides a direct benefit to insurance companies by lowering the cost of repairs,
by often decreasing the
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time required to return the repaired vehicle to the customer, and by providing a replacement product that is of high quality and comparable performance to the part
replaced.
Our sales personnel are encouraged to promote LKQ to customers as a “one-stop shop” by offering comparable options from our other product lines if the
desired part is not in stock. To support these efforts, we have provided our sales staff with access to both recycled and aftermarket sales systems to encourage cross
selling.
To better serve our customers, we take a consolidated approach to the electronic sale of wholesale products in our North America segment. A full suite of
e-commerce services is available to approved partners that helps us improve order accuracy, reduce return rate and better fit our customer workflow. Using these
services in coordination with our partners, products can be searched, priced and ordered without leaving the customers' own operating systems.
Distribution
We have a distribution network of warehouses and cross dock facilities, which allows us to develop and maintain our service levels with local repair
shops while providing fulfillment rates that are made possible by our nationwide presence. Our delivery fleet utilizes a third party software provider to optimize
delivery routes, and to track the progress of delivery vehicles throughout their runs. This third party software connects into each of our wholesale systems to allow
a single interface for our management team to have a single delivery to our customer, regardless of the product line or operating system. Our local presence allows
us to provide daily deliveries as required by our customers, using drivers who routinely deliver to the same customers. Our sales force and local delivery drivers
develop and maintain critical personal relationships with the local repair shops that benefit from access to our wide selection of products, which we are able to
offer as a result of our regional inventory network. We operate a delivery fleet of medium-sized trucks and smaller trucks and vans, which deliver multiple product
types on the same delivery routes to help minimize distribution costs and improve customer service.
Competition
We consider all suppliers of vehicle collision and mechanical products to be competitors, including aftermarket suppliers, recycling businesses,
refurbishing operations, parts remanufacturers, OEMs and internet-based suppliers. We compete with alternative parts distributors on the basis of our nationwide
distribution system, our product lines and inventory availability, customer service, our relationships with insurance companies, and to a lesser extent, price; we
compete with OEMs primarily on the basis of price and, to a lesser extent, on service and product quality. We do not consider retail chains that focus on the do-it-
yourself market to be our direct competitors since many of our wholesale product sales are influenced by insurance companies, who ultimately pay for the repair
costs of insured vehicles in excess of any deductible amount, rather than the end user, and there is limited overlap in the products that we sell.
Self Service Operations
Our self service retail operations, most of which operate under the name “LKQ Pick Your Part,” allow consumers to come directly to the yard to pick
parts off of salvage vehicles. In addition to revenue from the sale of parts, core, and scrap, we charge a nominal admission fee to access the property.
Inventory
We acquire inventory for our self service retail product operations from a variety of sources, including but not limited to towing companies, vehicle
auctions, the general public, municipality sales, insurance carriers, and charitable organizations. We procure salvage vehicles for our self service retail product
operations that are generally older and priced lower than the salvage vehicles we purchase for our wholesale recycled product operations. Vehicles are delivered to
our locations by the seller, or we arrange for transportation. Once on our property, minimal labor is required to process the vehicle other than removing the battery,
fluids, refrigerants, catalytic converters and hazardous materials. The extracted fluids are stored in bulk and subsequently sold to recyclers. Vehicles are then
placed in the yard for customers to remove parts. In our self service business, availability of a specific part will depend on which vehicles are currently at the site
and to what extent parts may have been previously sold. We usually keep a vehicle at our facility for 30 to 120 days, depending on the capacity of the yard and size
of the market, before it is crushed and sold to scrap metal processors.
Scrap and Other Materials
Our self service operations generate scrap metal, alloys and other materials that we sell to recyclers. Vehicles that we no longer make available to the
public and "crush only" vehicles acquired from other companies, including OEMs, are typically crushed using equipment on site. Damaged and unusable wheel
cores are melted in our aluminum furnace and sold to consumers of aluminum ingot and sow for the production of various automotive products, including wheels.
We also extract and sell the precious metals contained in certain of our recycled parts such as catalytic converters.
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Customers
The customers of our self service yards are frequently do-it-yourself mechanics, small independent repair shops servicing older vehicles, auto rebuilders,
and resellers. The scrap from the vehicle hulks, when not processed by us, is sold to metals recyclers, with whom we may also compete when procuring salvage
vehicles for our operations.
Competition
There are competitors operating self service businesses in all of the markets in which we operate. In some markets, there are numerous competitors, often
operating in close proximity to our operations. We try to differentiate our business by the quality of the inventory and the size and cleanliness of the property. We
also differentiate our business from our competitors through our app, which allows customers to receive daily push notifications when cars they are interested in
are placed into their favorite yards. In addition to allowing customers to see our available inventory, the app also allows customers to input search parameters such
as the specific part they are searching for, and the year, make, and model of the vehicle, to identify the population of cars that might be available to pull compatible
parts from. We do not consider retail chains that focus on the do-it-yourself market to be our direct competitors, as there is limited overlap in the products that we
sell.
EUROPE SEGMENT
Our Europe segment was built on four key acquisitions: ECP (2011), Sator (2013), Rhiag (2016) and Stahlgruber (2018). Additionally, in 2014 we
expanded our European segment to include wholesale recycling operations through our acquisition of a business with salvage and vehicle repair facilities in
Sweden and Norway, and in 2016, we acquired an equity investment in Mekonomen AB ("Mekonomen"), the leading independent car parts distributor in the
Nordic region of Europe. Mekonomen is independent of our existing European operations, but we have identified areas where the companies can work together in
a mutually beneficial manner, primarily related to procurement. Our European strategy is to target platform acquisitions to cover broad markets initially, then
integrate these businesses with our other operations and subsequently expand our footprint in these regions through new branch openings and smaller tuck-in
acquisitions. Our acquisitions provide a platform to capitalize on the large and fragmented aftermarket mechanical replacement parts market in Europe, and allow
for cost savings from the leveraging of our combined purchasing power given the significant overlap in suppliers and product mix. We have acquired many smaller
businesses within the regions we operate, and we are integrating our European operations as we optimize purchasing, warehousing, systems, logistics and back-
office functions, and align our private label brands across the segment.
In September 2019, we announced a multi-year program called "1 LKQ Europe," to further centralize and standardize certain key functions to improve the
efficiencies within the Europe segment. Under the 1 LKQ Europe program, we will reorganize 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 the creation of a Europe headquarters office in Zug,
Switzerland.
Inventory
Our inventory is primarily composed of mechanical aftermarket parts for the repair of vehicles 3 to 15 years old. Our top selling products include brake
pads, discs and sensors, clutches, electrical products such as spark plugs and batteries, steering and suspension products, filters, and oil and automotive fluids. In
addition to mechanical aftermarket parts, we also sell collision parts in our Europe segment, although these sales represent approximately 1% of total Europe
segment revenue.
In 2019, our top two suppliers represented 12% of our aftermarket inventory purchases, with our top supplier representing approximately 7% of our
purchases. No other suppliers comprised more than 5% of our purchases during 2019. In 2019, we purchased 94% of our products from companies in Europe. The
remaining 6% of our 2019 purchases were sourced from vendors located primarily in China or Taiwan, some of which also supply collision parts for our Wholesale
- North America operations. In 2019, 72% and 18% of our total inventory purchases were made in euros and pounds sterling, respectively.
In our Nordic operations, we purchase severely damaged or totaled vehicles from insurance companies, which are transferred to our dismantling facilities
or sold to other third party dismantlers.
Information Technology Systems
Our aftermarket operations in Europe use various information technology (“IT”) systems. Our systems are complex and are designed to perform a variety
of tasks (depending on the market), including: manage customer orders and inventory movement, optimize our warehouse and logistics, and financial reporting.
Certain of our IT systems can interface with our repair shop customers' respective IT systems, which enables customers to identify and order the part required for
the repair. As part of our 1 LKQ Europe strategy to create an integrated European company, we initiated a multi-year program to develop and
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implement a European wide ERP system, which will reduce the number of IT systems we operate. A pilot for our ERP system was successfully deployed in the
operating unit in Switzerland in the first quarter of 2020.
Customers
We primarily operate a two-step (i.e. direct sales to repair shop customers) distribution model in Europe, although certain of our operations, such as Italy,
the Netherlands, Germany, Switzerland, and Hungary, operate partially a three-step (i.e. sales to distributors who in turn sell to repair shop customers) distribution
model. In our two-step operations, we sell the majority of our products to commercial customers primarily consisting of professional repairers, including both
independent mechanical repair shops and collision repair shops. In our three-step operations, we sell products to wholesale distributors or jobbers. In addition to
our sales to repair shops and wholesale distributors, we generate a portion of our revenue through sales to retail customers from e-commerce platforms and from
counter sales at the branch locations.
Distribution
Our European operations employ a distribution model in which inventory is stored at national or international distribution centers or regional hubs, with
fast moving product stored at branch locations. The large distribution centers regularly re-stock the smaller branches and hubs and hold slower moving items
helping us to improve fulfillment rates. Product is moved through the distribution network on our trucks, vans or via common carrier.
Competition
We view all suppliers of replacement repair products as our competitors, including other alternative parts suppliers and OEMs and their dealer networks.
We face significant competition in many markets where even smaller competitors can compete on price and service and the OEMs compete via ties to, and brand
loyalty of, the consumer while also remaining competitive on price, service and availability. We believe we have been able to distinguish ourselves from other
alternative parts suppliers primarily through our distribution network, efficient stock management systems and proprietary technology, which allows us to deliver
our products quickly, as well as through our product lines and inventory availability, pricing, and service.
SPECIALTY SEGMENT
Our Specialty operating segment was formed in 2014 with our acquisition of Keystone Specialty, a leading distributor and marketer of specialty vehicle
aftermarket products and accessories in North America. Our Specialty operations reach most major markets in the U.S. and Canada and serve the following six
product segments: RV; truck and off-road; towing; speed and performance; wheels, tires and performance handling; and miscellaneous accessories. In 2017, we
acquired Warn Industries, Inc. ("Warn"), a leading designer, manufacturer and marketer of high performance vehicle equipment and accessories. The acquisition of
Warn expanded our presence in the specialty market and created viable points of entry into related markets.
Inventory
The specialty vehicle aftermarket equipment and accessories we distribute and raw materials for products we manufacture are purchased from suppliers
located primarily in the U.S., Canada, and China. Our top selling products are RV appliances & air conditioners, towing hitches, truck bed covers, vehicle
protection products, cargo management products, and wheels, tires & suspension products. Specialty aftermarket suppliers are typically small to medium-sized,
independent businesses that focus on a narrow product or market niche. Due to the highly fragmented supplier base for specialty vehicle aftermarket products, we
have limited supplier concentration. In 2019, approximately 15% of our specialty vehicle aftermarket purchases were made from our top two suppliers, with our
largest supplier providing approximately 10% of our annual inventory purchases. No other suppliers comprised more than 5% of our purchases during 2019. With
our 2017 acquisition of Warn, we have internal manufacturing capabilities to source aftermarket winches, hoists, and bumpers.
Most of our Specialty operations utilize an internally developed inventory management and order entry system that interfaces with third party software
systems for accounting, transaction processing, data analytics, and reporting.
Customers
Overall, the specialty vehicle aftermarket parts and accessories market serves a fragmented customer base composed of RV and specialty automotive
dealers, installers, jobbers, builders, parts chains, and mail-order businesses. Our customers are principally small, independent businesses. These customers depend
on us to provide a broad range of products, rapid delivery, marketing support and technical assistance. In addition to traditional customers, in recent years we have
increased sales to several large parts and accessory online retailers. Our Specialty segment also operates retail stores in northeast Pennsylvania.
We promote our products to customers through marketing programs, which include: (i) catalogs, advertising, sponsorships and promotional activities, (ii)
product level marketing and merchandising support, and (iii) online and digital
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marketing initiatives. Our national footprint allows us to stage trade shows across the U.S., which provide an opportunity to improve sales through the showcasing
of new and innovative products from our vendors to our customers.
Online sales of our Specialty products take place primarily through our ekeystone.com and viantp.com sites and mobile app. These sites provide
customers (i) the ability to match products with the make and model of vehicle thus allowing the customer to order the correct part, (ii) product information (e.g.
pictures, attributes) available for review and (iii) the convenience of searching inventory availability and ordering the product on the site. Additionally, the site can
provide sales opportunities by suggesting other parts to purchase based on an inquiry submitted by the customer.
Distribution
Our Specialty segment operations employ a hub-and-spoke distribution model which enables us to transport products from our primary distribution
centers to our non-inventory stocking cross docks, a majority of which are co-located with our North America wholesale operations and provide distribution points
to key regional markets and synergies with our existing infrastructure. We believe this provides added value to our customers through a broader product offering
and more efficient distribution process. We use our delivery routes to provide delivery and returns of our products directly to and from our customers in all 48
continental U.S. states and 9 Canadian provinces, and we ship globally to customers in other countries. Our delivery fleet utilizes a third party software provider to
optimize delivery routes, and to track the progress of delivery vehicles throughout their runs.
Competition
Industry participants have a variety of supply choices. Vendors can deliver products to market via warehouse distributors and mail order catalog
businesses, or directly to retailers and/or consumers. We view all suppliers of specialty vehicle aftermarket equipment and accessories as our competitors. We
believe we have been able to distinguish ourselves from other specialty vehicle aftermarket parts and equipment suppliers primarily through our broad product
selection, which encompasses both popular and hard-to-find products, our national distribution network, and efficient inventory management systems, as well as
through our service. We compete on the basis of product breadth and depth, rapid and dependable delivery, marketing initiatives, support services, and price.
INTELLECTUAL PROPERTY
We own and have the right to use various intellectual property, including intellectual property acquired as a result of past acquisitions. In addition to trade
names, trademarks and patents, we also have technology-based intellectual property that has been both internally developed and obtained through license
agreements and acquisitions. We do not believe that our business is materially dependent on any single item of intellectual property, or any single group of related
intellectual property, owned or licensed, nor would the expiration of any particular item or related group of intellectual property, or the termination of any
particular intellectual property license agreement materially affect our business.
EMPLOYEES
As of December 31, 2019, we employed approximately 51,000 persons, of which approximately 21,000 were employed in North America and
approximately 30,000 were employed outside of North America. Of our employees in North America, approximately 800 were represented by unions. Outside of
North America, we have government-mandated collective bargaining agreements and union contracts in certain countries, particularly in Europe where many of
our employees are represented by unions and/or works councils. We consider our employee relations to be good.
FACILITIES
As of December 31, 2019, our operations included approximately 1,700 facilities, most of which are leased. Of our total facilities, approximately 550
facilities were located in the U.S. and approximately 1,150 facilities were located in over 25 other countries. Many of our locations stock multiple product types or
serve more than one function.
Our global headquarters are located at 500 West Madison Street, Chicago, Illinois 60661.
Our North American headquarters, in Nashville, Tennessee, performs certain centralized functions for our North American operations, including
accounting, procurement, and information systems support.
Our European operations are distributed throughout Europe with main offices in Tamworth, England; in Schiedam and Amsterdam, the Netherlands; in
Milan, Italy; in Prague, Czech Republic; and in Poing, Germany. In addition to these offices, we have two national distribution centers in Tamworth totaling
1,000,000 and 500,000 square feet, respectively, which house inventory to supply the hubs and branches of our U.K. and Republic of Ireland operations, and one
international distribution center in Sulzbach-Rosenberg, Germany which supplies Stahlgruber’s operations in Germany, Austria, Italy, Slovenia and Croatia. Under
the 1 LKQ Europe program, we are establishing a Europe headquarters office in Zug, Switzerland.
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Our Specialty operations maintain primary procurement, accounting and finance functions in Exeter, Pennsylvania.
Certain back-office support functions for our segments are performed in Bangalore, India. Additionally, we operate an aftermarket parts warehouse in
Taiwan to aggregate inventory for shipment to our locations in North America.
REGULATION
Our operations and properties are subject to laws and regulations relating to the protection of the environment in the U.S. and the other countries in which
we operate. See the risk factor “We are subject to environmental regulations and incur costs relating to environmental matters” in Part I, Item 1A of this Annual
Report on Form 10-K for further information regarding the effects of environmental laws and regulations on us.
We may be affected by tariffs and other import laws and restrictions because we import into the U.S. a significant number of products for sale and
distribution. See the risk factors “If significant tariffs or other restrictions are placed on products or materials we import or any related counter-measures are taken
by countries to which we export products, our revenue and results of operations may be materially harmed” and “Intellectual property claims relating to
aftermarket products could adversely affect our business” in Part 1, Item 1A of this Annual Report on Form 10-K for further information regarding importation
risks.
Our business processes and operations are subject to laws and regulations relating to privacy and data protection. See the risk factor “The costs of
complying with the requirements of laws pertaining to the privacy and security of personal information and the potential liability associated with the failure to
comply with such laws could materially adversely affect our business and results of operations” in Part 1, Item 1A of this Annual Report on Form 10-K for further
information about privacy and data protection risks.
Some jurisdictions have enacted laws to restrict or prohibit the sale of alternative vehicle parts. See the risk factor “Existing or new laws and regulations,
or changes to enforcement or interpretation of existing laws or regulations, may prohibit, restrict or burden the sale of aftermarket, recycled, refurbished or
remanufactured products” in Part 1, Item 1A of this Annual Report on Form 10-K for further information concerning regulatory restrictions on the sale of our
products.
We have thousands of employees located in the U.S. and many other countries and are subject to labor and employment laws in numerous
jurisdictions. See the risk factor “Our business may be adversely affected by union activities and labor and employment laws” in Part 1, Item 1A of this Annual
Report on Form 10-K for further information regarding these labor and employment risks.
SEASONALITY
Our operating results are subject to quarterly variations based on a variety of factors, influenced primarily by seasonal changes in weather patterns.
During the winter months, we tend to have higher demand for our vehicle replacement products because there are more weather related repairs. Our specialty
vehicle operations typically generate greater revenue and earnings in the second quarter, when vehicle owners tend to install this equipment, and lower revenue and
earnings in the fourth quarter, when the number of RV trips tends to decline as a result of the winter weather. Our aftermarket glass operations typically generate
greater revenue and earnings in the second and third quarters, when the demand for automotive replacement glass increases after the winter weather.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE MATTERS
Environmental
We contribute to a healthy environment. For example, our North American recycling operations harvest vehicle components for reuse in the repair of
vehicles. Once the parts are harvested, the remaining valuable materials are removed and repurposed for use in the manufacturing of new basic materials such as
steel, aluminum, plastic and rubber. Additionally, we extract fluids that we recycle or utilize in our own operations, such as gas to run our own truck fleet.
Our recycling efforts are a key pillar of our mission statement of being a responsible steward of the environment and a true partner with the communities
in which we operate. This stewardship has been embedded in our culture since the company’s founding in 1998. Our recycling efforts preserve natural resources,
reduce the demand for scarce landfill space, and help decrease air and water pollution.
The table below highlights our North American recycling operation’s efforts in 2019 to minimize the environmental impact of total loss and end-of-life
vehicles with effective and proper vehicle disposition, and lists the approximate number or amount of parts or other materials removed from such vehicles and sold
or used by us in our operations (in thousands).
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Number of vehicles procured
Catalytic converters
Tires
Batteries
Waste oil (in gallons)
Anti-freeze/Washer fluid (in gallons)
Fuel (in gallons)
Total number of individual parts sold
2019 Totals
887
1,471
2,552
630
2,588
347
4,173
15,244
Social
We continuously strive to improve the effect of our operations, and the awareness of all of our employees, with respect to social issues. We seek diversity
of our employees and do not discriminate in our employment with respect to race, color, ethnicity, national origin, ancestry, citizenship status, religion, sex, gender
identity and expression, age, disability, protected medical condition, marital status, veteran or military status, sexual orientation, pregnancy, genetic information, or
any other characteristic protected by civil rights laws. We do not tolerate harassment or retaliation against persons that report improper behavior.
We have shared with our employees some of the benefits we received as part of the Tax Reform Act of 2017, including through a reduction of medical
care premiums, an increase in paid time off, an increase in the Company’s matching amount under our retirement plan, a tuition reimbursement program, and a
scholarship program for the children of our employees. In addition, we have established a fund to help employees that experience catastrophic losses.
We also strive to improve the communities in which we operate. The employees at our facilities are encouraged to volunteer in local community
activities, and we have established a charitable foundation to distribute funds to local causes.
Governance
We have made substantial progress in the area of corporate governance. For example, we have three female members on our Board of Directors, and we
have added five new members to the Board since August 2018. After the departure from the Board by two of our current directors at our Annual Meeting of
Stockholders in May 2020, over 80% of our directors will be independent. We believe that the skill sets of our newly constituted Board effectively address the
areas of focus that are important for our short and long-term strategic objectives.
We have adopted “proxy access,” which permits an eligible stockholder to nominate and include in our proxy materials director nominees (subject to the
terms set forth in our Bylaws). We also have majority voting for the election of our directors, requiring a director who fails to receive a majority vote to tender his
or her resignation to the Board.
Our Board of Directors recently adopted a revised Code of Ethics to help ensure that everyone at LKQ is clear on our mission, values and guiding ethical
principles. The Code of Ethics covers a variety of topics, including the health and safety of our employees, fair dealing with our customers, suppliers and
competitors, anti-bribery rules, conflict of interest prohibitions, and protecting personal data.
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ITEM 1A. RISK FACTORS
Risks Relating to Our Business
Our operating results and financial condition have been and could continue to be adversely affected by the economic, political and social conditions in the U.S.
and elsewhere.
Changes in economic, political and social conditions in the U.S., Europe and other countries in which we are located or do business could have a material
effect on our company. Negative effects to our supply chain, costs of doing business, sales and distribution activity may occur due to factors such as war or threats
of war, natural disasters, nuclear facility accidents, public health emergencies, utility interruptions and terrorism.
Our business is also affected by a number of other factors. For example, the number and types of new vehicles produced and sold by manufacturers
affects our business. A decrease in the number of vehicles on the road may result in a decrease in repairs.
Our sales are also impacted by changes to the economic health of vehicle owners. The economic health of vehicle owners is affected by many factors,
including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, taxation, fuel prices,
unemployment trends and other matters that influence consumer confidence and spending. Many of these factors are outside of our control. If any of these
conditions worsen, our business, results of operations, financial condition and cash flows could be adversely affected.
In addition, economic conditions, including decreased access to credit, may result in financial difficulties leading to restructurings, bankruptcies,
liquidations and other unfavorable events for our customers, suppliers, logistics and other service providers and financial institutions that are counterparties to our
credit facilities and hedge transactions. These unfavorable events affecting our business partners could have an adverse effect on our business, results of operations,
financial condition and cash flows.
We have a substantial business presence in Europe, including a significant presence in the U.K. and the Republic of Ireland (“ROI”). In June 2016, voters
in the U.K. decided by referendum to withdraw from the European Union (also known as Brexit). The precise timing and impacts of this action on our businesses
in the U.K. and other parts of Europe are unknown at this time. Since the vote, we have seen fluctuations in exchange rates leading to cost pressures and
unfavorable translation effects on our sterling denominated earnings. The U.K.’s withdrawal from the European Union became effective on January 31, 2020. The
U.K. and the European Union now have an 11-month transition period to negotiate a trade deal and come to terms on other issues such as security and law
enforcement. Depending upon the outcome of these negotiations, our European businesses could be adversely affected as a result of further fluctuations in
exchange rates, disruptions to access to markets by U.K. and ROI companies, interruptions of the movement of goods and services between countries, a decrease of
economic activity in Europe, and political or social unrest.
We face intense competition from local, national, international, and internet-based vehicle products providers, and this competition could negatively affect our
business.
The vehicle replacement products industry and vehicle accessory parts industry are highly competitive and are served by numerous suppliers of OEM,
recycled, aftermarket, refurbished and remanufactured products. Within each of these categories of suppliers, there are local owner-operated companies, larger
regional suppliers, national and international providers, and internet-based suppliers and distributors. Providers of vehicle replacement and accessory products that
have traditionally sold only certain categories of such products may decide to expand their product offerings into other categories of vehicle products, which may
further increase competition. Some of our current and potential competitors may have more operational expertise; greater financial, technical, manufacturing,
distribution, and other resources; longer operating histories; lower cost structures; and better relationships in the insurance and vehicle repair industries or with
consumers, than we do. Business transacted on online marketplaces has been increasing, which presents additional competitive pressures on us; in addition,
facilitators of these online marketplaces control access to this channel and may prohibit us from participating for various reasons.
In the U.S. and Europe, local companies have formed cooperative efforts in an attempt to more efficiently compete against us in all aspects of our
business. As a result of these factors, our competitors may be able to provide products that we are unable to supply, provide their products at lower costs, or supply
products to customers that we are unable to serve.
We believe that a majority of collision parts by dollar amount are supplied by OEMs, with the balance being supplied by distributors of alternative
aftermarket, recycled, refurbished and remanufactured collision parts like us. The OEMs are therefore able to exert pricing pressure in the marketplace. We
compete with the OEMs primarily on price and to a lesser extent on service and quality. From time to time, the OEMs have implemented programs seeking to
increase their market share in the collision repair parts industry. For example, they have reduced prices on specific products to match the lower prices of
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alternative products and introduced other rebate programs that may disrupt our sales. The growth of these programs or the introduction of new ones could have a
material adverse impact on our business.
In addition, vehicles are being equipped with systems that transmit data to the OEMs wirelessly regarding, among other items, accident incidents,
maintenance requirements, location of the vehicle, identification of the closest dealership, and other statistics about the vehicle and its driving history. To the extent
that this data is not shared with alternative suppliers, the OEMs will have an advantage with respect to such matters as contacting the vehicle driver, recommending
repairs and maintenance, and directing the vehicle owner to an affiliated dealership.
We rely upon our customers and insurance companies to promote the usage of alternative parts.
Our success depends, in part, on the acceptance and promotion of alternative parts usage by automotive insurance companies and vehicle repair
facilities. There can be no assurance that current levels of alternative parts usage will be maintained or will increase in the future.
We rely on business relationships with insurance companies. These insurance companies encourage vehicle repair facilities to use products we provide.
The business relationships include in some cases participation in aftermarket quality and service assurance programs that may result in a higher usage of our
aftermarket products than would be the case without the programs. Our arrangements with these companies may be terminated by them at any time, including in
connection with their own business concerns relating to the offering, availability, standards or operations of the aftermarket quality and service assurance
programs. We rely on these relationships for sales to some collision repair shops, and a termination of these relationships may result in a loss of sales, which could
adversely affect our results of operations.
In an Illinois lawsuit involving State Farm Mutual Automobile Insurance Company ("Avery v. State Farm"), a jury decided in October 1999 that State
Farm breached certain insurance contracts with its policyholders by using non-OEM replacement products to repair damaged vehicles when use of such products
did not restore the vehicle to its "pre-loss condition." The jury found that State Farm misled its customers by not disclosing the use of non-OEM replacement
products and the alleged inferiority of those products. Damages in excess of $1 billion were assessed against State Farm. In August 2005, the Illinois Supreme
Court reversed the awards made by the lower courts and found, among other things, that the plaintiffs had failed to establish any breach of contract by State Farm.
The plaintiffs filed a subsequent claim alleging that State Farm improperly influenced one of the justices on the Illinois Supreme Court. Prior to trial on the
subsequent claim, the parties settled the case; as part of the settlement, State Farm paid the plaintiffs $250 million. As a result of this case, some insurance
companies reduced or eliminated their use of aftermarket products. Our financial results could be adversely affected if insurance companies modified or terminated
the arrangements pursuant to which repair shops buy aftermarket or recycled products from us due to a fear of similar claims.
In addition, to the extent that the collision repair industry continues to consolidate, the buying power of collision repair shop customers may further
increase, putting additional pressure on our financial returns.
We may not be able to successfully acquire new businesses or integrate acquisitions, and we may not be able to successfully divest certain businesses.
We may not be able to successfully complete potential strategic acquisitions if we cannot reach agreement on acceptable terms, if we do not obtain
required antitrust or other regulatory approvals, or for other reasons. Moreover, we may not be able to identify acquisition candidates at reasonable prices and/or be
able to successfully integrate acquisitions.
If we buy a company or a division of a company, we may experience difficulty integrating that company's or division's personnel and operations, which
could negatively affect our operating results. In addition:
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the key personnel of the acquired company may decide not to work for us;
customers of the acquired company may decide not to purchase products from us;
suppliers of the acquired company may decide not to sell products to us;
we may experience business disruptions as a result of information technology systems conversions;
we may experience additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, and financial
reporting;
we may be held liable for environmental, tax or other risks and liabilities as a result of our acquisitions, some of which we may not have discovered
during our due diligence;
we may intentionally assume the liabilities of the companies we acquire, which could result in material adverse effects on our business;
our existing business may be disrupted or receive insufficient management attention;
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we may not be able to realize the cost savings or other financial benefits we anticipated, either in the amount or in the time frame that we expect; and
we may incur debt or issue equity securities to pay for any future acquisition, the issuance of which could involve the imposition of restrictive covenants
or be dilutive to our existing stockholders.
For example, 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; this program will present a number of execution challenges.
In addition to acquisitions, we have divested, and will continue to divest, certain businesses that do not meet our performance standards. As a result of a
divestment, we may not recover the carrying value of our investment in the divested business; in addition, such divestment transactions require significant
management time and attention.
Intellectual property claims relating to aftermarket products could adversely affect our business.
OEMs and others have attempted to use claims of intellectual property infringement against manufacturers and distributors of aftermarket products to
restrict or eliminate the sale of aftermarket products that are the subject of the claims. OEMs have brought such claims in federal court and with the U.S.
International Trade Commission. In some cases, we have entered into patent license agreements with OEMs that allow us to sell aftermarket parts that replicate the
patented parts in exchange for a royalty and otherwise in accordance with the terms of the agreements.
To the extent OEMs and other manufacturers obtain design patents or trademarks and are successful in asserting claims of infringement of these patents
or trademarks against us, we could be restricted or prohibited from selling certain aftermarket products, which could have an adverse effect on our business. In the
event that our license agreements, or other similar license arrangements with OEMs or others, are terminated or we are unable to agree upon renewal terms, we
may be subject to costs and uncertainties of litigation as well as restrictions on our ability to sell aftermarket parts that replicate parts covered by those design
patents or trademarks. We have filed, and may file in the future, challenges to OEM patents, including patents owned by OEMs with which we have patent license
agreements. We also may file challenges to OEM trademarks. To the extent OEMs are successful in defending their patents or trademarks, we could be restricted
or prohibited from selling the corresponding aftermarket products, which could have an adverse effect on our business. Also, we will likely incur expenses
investigating, pursuing and defending intellectual property claims.
U.S. Customs and Border Protection has taken the position that certain of our aftermarket parts infringe certain OEM trademarks and seized our
aftermarket parts as we attempted to import them into the U.S. We incur costs and expenses attempting to convince Customs and Border Protection to release the
seized goods and in litigation where we are seeking a determination of non-infringement. In the event we are unsuccessful in obtaining their release, such goods
may be subject to forfeiture and other penalties.
Aftermarket products certifying organizations may revoke the certification of parts that are the subject of the intellectual property disputes. Lack of
certification may negatively impact us because many major insurance companies recommend or require the use of aftermarket products only if they have been
certified by an independent certifying organization.
If the number of vehicles involved in accidents declines or the number of cars being repaired declines, or the mix of the types of vehicles in the overall vehicle
population changes, our business could suffer.
Our business depends on vehicle accidents, mechanical failures and routine maintenance for both the demand for repairs using our products and the
supply of recycled, remanufactured and refurbished parts. To the extent that a relatively higher percentage of damaged vehicles are declared total losses, there will
be less demand for our products to repair such vehicles. In addition, our business is impacted by factors that influence the number and/or severity of accidents and
mechanical failures including, but not limited to, the number of vehicles on the road, the number of miles driven, the ages of drivers, the occurrence and severity of
certain weather conditions, the congestion of traffic, drivers distracted by electronic equipment, the use of alcohol or drugs by drivers, the usage rate and
effectiveness of accident avoidance systems in new vehicles, the reliability of new OEM parts, and the condition of roadways. For example, an increase in the
acceptance of ride-sharing could reduce the number of vehicles on the road. Additionally, an increase in fuel prices may cause the number of vehicles on the road,
the number of miles driven, and the need for mechanical repairs and maintenance to decline, as motorists seek alternative transportation options. Mild weather
conditions, particularly during winter months, tend to result in a decrease in vehicle accidents. Moreover, legislation banning the use of handheld cellular
telephones or other electronic devices while driving could lead to a decline in accidents.
Systems designed to minimize accident frequency and severity are becoming more prevalent and more technologically sophisticated. To the extent
OEMs install or are mandated by law to install accident avoidance systems in their vehicles, the number and severity of accidents could decrease, which could have
a material adverse effect on our business.
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The average number of new vehicles sold annually has fluctuated from year-to-year. Periods of decreased sales could result in a reduction in the number
of vehicles on the road and consequently fewer vehicles involved in accidents or in need of mechanical repair or maintenance. Substantial further declines in
automotive sales in the future could have a material adverse effect on our business, results of operations and/or financial condition. In addition, if vehicle
population trends result in a disproportionately high number of older vehicles on the road, insurance companies may find it uneconomical to repair such vehicles or
there could be less costly repairs. If vehicle population trends result in a disproportionately high number of newer vehicles on the road, the demand generally for
mechanical repairs and maintenance would likely decline due to the newer, longer-lasting parts in the vehicle population and mechanical failures being covered by
OEM warranties for the first years of a vehicle's life. Moreover, alternative collision and mechanical parts are less likely to be used on newer vehicles. Our
Specialty segment depends on sales of pickup trucks, sport utility vehicles, crossover utility vehicles, high performance vehicles and recreational vehicles; any
reduction in the number of such vehicles in operation will adversely affect demand for our Specialty products.
Electric vehicles do not have traditional engines, transmissions, and certain related parts. Engines and transmissions represent some of our largest
revenue generating SKUs in North America, and parts for engines and transmissions represent a significant amount of the revenue of our European operations.
Thus, an increase in electric vehicles as a percentage of vehicles sold will have a negative impact on our sales of engines, transmissions, and other related parts.
Fluctuations in the prices of metals and other commodities could adversely affect our financial results.
Our recycling operations generate scrap metal and other metals that we sell. After we dismantle a salvage vehicle for wholesale parts and after vehicles
have been processed in our self service retail business, the remaining vehicle hulks are sold to scrap processors and other remaining metals are sold to processors
and brokers of metals. In addition, we receive "crush only" vehicles from other companies, including OEMs, which we dismantle and which generate scrap metal
and other metals. The prices of scrap and other metals have historically fluctuated, sometimes significantly, due to market factors. In addition, buyers may stop
purchasing metals entirely due to excess supply. To the extent that the prices of metals decrease materially or buyers stop purchasing metals, our revenue from
such sales will suffer and a write-down of our inventory value could be required. For example, in 2018 China imposed a ban on the importation of various types of
solid waste allegedly in an effort to reduce environmental pollution. This ban includes certain metals that we sell and continues to have the effect of reducing the
prices of such products.
The cost of our wholesale recycled and our self service retail inventory purchases will change as a result of fluctuating scrap metal and other metals
prices. In a period of falling metal prices, there can be no assurance that our inventory purchasing cost will decrease the same amount or at the same rate as the
scrap metal and other metals prices decline, and there may be a delay between the scrap metal and other metals price reductions and any inventory cost reductions.
The prices of steel, aluminum, and plastics are components of the cost to manufacture products for our aftermarket business. If the prices of commodities rise and
result in higher costs to us for products we sell, we may not be able to pass these higher costs on to our customers.
Existing or new laws and regulations, or changes to enforcement or interpretation of existing laws or regulations, may prohibit, restrict or burden the sale of
aftermarket, recycled, refurbished or remanufactured products.
Most states have passed laws that prohibit or limit the use of aftermarket products in collision repair work. These laws include requirements relating to
consumer disclosure, vehicle owner’s consent regarding the use of aftermarket products in the repair process, and the requirement to have aftermarket products
certified by an independent testing organization. Additional legislation of this kind may be introduced in the future. If additional laws prohibiting or restricting the
use of aftermarket products are passed, it could have an adverse impact on our aftermarket products business.
Certain organizations test the quality and safety of vehicle replacement products. If these organizations decide not to test a particular vehicle product, or in
the event that such organizations decide that a particular vehicle product does not meet applicable quality or safety standards, we may decide to discontinue sales of
such product or insurance companies may decide to discontinue authorization of repairs using such product. Such events could adversely affect our business.
Some jurisdictions have enacted laws prohibiting or severely restricting the sale of certain recycled products that we provide, such as airbags. In addition,
laws relating to the regulation of parts affecting vehicle emissions, such as California’s Proposition 65, may impact the ability of our Specialty segment to sell
certain accessory products. These and other jurisdictions could enact similar laws or could prohibit or severely restrict the sale of additional recycled products. The
passage of legislation with prohibitions or restrictions that are more severe than current laws could have a material adverse impact on our business. Additionally,
Congress could enact federal legislation restricting the use of aftermarket or recycled automotive products used in the course of vehicle repairs.
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The Federal Trade Commission has issued guides that regulate the use of certain terms such as “rebuilt” or “remanufactured” in connection with the sale
of automotive parts. Restrictions on the products we are able to sell and on the marketing of such products could decrease our revenue and have an adverse effect
on our business and operations.
In 1992, Congress enacted the Anti-Car Theft Act to deter trafficking in stolen vehicles. The purpose of the law is to implement an electronic system to
track and monitor vehicle identification numbers and major automotive parts. In January 2009, the U.S. Department of Justice implemented the portion of the
system to track and monitor vehicle identification numbers. The portion of the system that would track and monitor major automotive parts would require various
entities, including automotive parts recyclers like us, to inspect salvage vehicles for the purpose of collecting the part number for any "covered major part." The
Department of Justice has not promulgated rules on this portion of the system, and therefore there has been no progress on the implementation of the system to
track and monitor major automotive parts. However, if this system is fully implemented, the requirement to collect the information would place substantial burdens
on vehicle recyclers, including us, that otherwise would not normally exist. It would place similar burdens on repair shops, which may discourage the use by such
shops of recycled products. There is no pending initiative to implement the parts registration from a law enforcement point of view. However, there is a risk that a
heightened legislative concern over safety of parts might precipitate an effort to push for the implementation of such rules.
An adverse change in our relationships with our suppliers or a disruption to our supply of inventory could increase our expenses and impede our ability to
serve our customers.
Our North American business is dependent on a relatively small number of suppliers of aftermarket products, a large portion of which are sourced from
Taiwan. Our European business also acquires product from Asian sources. We incur substantial freight costs to import parts from our suppliers, many of which are
located in Asia. If the cost of freight rose, we might not be able to pass the cost increases on to our customers. Furthermore, although alternative suppliers exist for
substantially all aftermarket products distributed by us, the loss of any one supplier could have a material adverse effect on us until alternative suppliers are located
and have commenced manufacturing and providing the relevant products. In addition, we are subject to disruptions from work stoppages and other labor disputes at
port facilities through which we import our inventory. We also face the risk that our suppliers could attempt to circumvent us and sell their product directly to our
customers; consolidation of our suppliers could enhance their ability to distribute products through additional sales channels and thus decrease their reliance on
wholesale distributors like us.
Moreover, our operations are subject to the customary risks of doing business abroad, including, among other things, natural disasters, transportation costs
and delays, political instability, currency fluctuations and the imposition of tariffs, import and export controls and other non-tariff barriers (including changes in the
allocation of quotas), as well as the uncertainty regarding future relations between China, Japan and Taiwan. For example, U.S. Customs and Border Protection
have used claims of intellectual property infringement to seize certain of our aftermarket parts as we attempted to import them into the U.S.
Because a substantial volume of our sales involves products manufactured from sheet metal, we can be adversely impacted if sheet metal becomes
unavailable or is only available at higher prices, which we may not be able to pass on to our customers. Additionally, as OEMs convert to raw materials other than
steel, it may be more difficult or expensive to source aftermarket parts made with such materials and it may be more difficult for repair shops to work with such
materials in the repair process.
Most of our salvage and a portion of our self service inventory is obtained from vehicles offered at salvage auctions operated by several companies that
own auction facilities in numerous locations across the U.S. We do not typically have contracts with the auction companies. According to industry analysts, a small
number of companies control a large percentage of the salvage auction market in the U.S. If an auction company prohibited us from participating in its auctions,
began competing with us, or significantly raised its fees, our business could be adversely affected through higher costs or the resulting potential inability to service
our customers. Moreover, we face competition in the purchase of vehicles from direct competitors, rebuilders, exporters and other bidders. To the extent that the
number of bidders increases, it may have the effect of increasing our cost of goods sold for wholesale recycled products. Some states regulate bidders to help
ensure that salvage vehicles are purchased for legal purposes by qualified buyers. Auction companies have been actively seeking to reduce, circumvent or eliminate
these regulations, which would further increase the number of bidders.
In addition, there is a limited supply of salvage vehicles in the U.S., and thus the costs to us of these vehicles could increase over time. In some states,
when a vehicle is deemed a total loss, a salvage title is issued. Whether states issue salvage titles is important to the supply of inventory for the vehicle recycling
industry because an increase in vehicles that qualify as salvage vehicles provides greater availability and typically lowers the price of such vehicles. Currently,
these titling issues are a matter of state law. In 1992, the U.S. Congress commissioned an advisory committee to study problems relating to vehicle titling,
registration, and salvage. Since then, legislation has been introduced seeking to establish national uniform requirements in this area, including a uniform definition
of a salvage vehicle. The vehicle recycling industry will generally favor a uniform
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definition, since it will avoid inconsistencies across state lines, and will generally favor a definition that expands the number of damaged vehicles that qualify as
salvage. However, certain interest groups, including repair shops and some insurance associations, may oppose this type of legislation. National legislation has not
yet been enacted in this area, and there can be no assurance that such legislation will be enacted in the future.
We also acquire inventory directly from insurance companies, OEMs, and others. To the extent that these suppliers decide to discontinue these
arrangements, our business could be adversely affected through higher costs or the resulting potential inability to service our customers.
In Europe, we acquire products from a wide variety of suppliers. As vehicle technology changes, some parts will become more complex and the design
or technology of those parts may be covered by patents or other rights that make it difficult for aftermarket suppliers to produce for sale to companies such as ours.
The complexity of the parts may include software or other technical aspects that make it difficult to identify what is wrong with the vehicle. More complex parts
may be difficult to repair and may require expensive or difficult to obtain software updates, limiting our ability to compete with the OEMs.
Our annual and quarterly performance may fluctuate.
Our revenue, cost of goods sold, and 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, many of which are beyond our control. Future factors that may affect our operating results include, but are
not limited to, those listed in the Special Note on Forward-Looking Statements in this Annual Report on Form 10-K. Additionally, the number of selling days can
fluctuate each quarter causing volatility in revenue and net income. Accordingly, our results of operations may not be indicative of future performance. These
fluctuations in our operating results may cause our results to fall below our published financial guidance and the expectations of public markets, which could cause
our stock price or the value of our debt instruments to decline.
Our key management personnel are important to successfully manage our business and achieve our objectives.
Our future success depends in large part upon the leadership and performance of our executive management team and key employees at the operating
level. If we lose the services of one or more of our executive officers or key employees, or if one or more of them decides to join a competitor or otherwise
compete directly or indirectly with us, we may not be able to successfully manage our business or achieve our business objectives. If we lose the services of any of
our key employees at the operating or regional level, we may not be able to replace them with similarly qualified personnel, which could harm our business. In
addition, to the extent wage inflation occurs in jurisdictions in which we operate, we may not be able to retain key employees or we may experience increased
costs.
We operate in foreign jurisdictions, which exposes us to foreign exchange and other risks.
We have operations in North America, Europe and Taiwan, and we may expand our operations in the countries in which we do business and into other
countries. Our foreign operations expose us to additional risks associated with international business, which could have an adverse effect on our business, results of
operations and/or financial condition, including import and export requirements and compliance with anti-corruption laws, such as the U.K. Bribery Act 2010 and
the Foreign Corrupt Practices Act. We also incur costs in currencies other than our functional currencies in some of the countries in which we operate. We are thus
subject to foreign exchange exposure to the extent that we operate in different currencies, as well as exposure to foreign tax and other foreign and domestic laws. In
addition, certain countries in which we operate have a higher level of political instability and criminal activity than the U.S. that could affect our operations and the
ability to maintain our supply of products.
If we determine that our goodwill or other intangible assets have become impaired, we may incur significant charges to our pre-tax income.
Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. In the future, our goodwill and
intangible assets may increase as a result of acquisitions. Goodwill is reviewed at least annually for impairment. Impairment may result from, among other things,
deterioration in the performance of acquired businesses, deterioration of expected future cash flows or performance, increases in our cost of capital, adverse market
conditions, and adverse changes in applicable laws or regulations, including modifications that restrict the activities of the acquired business. As of December 31,
2019, our total goodwill subject to future impairment testing was $4.4 billion. For further discussion of our annual impairment test, see "Goodwill Impairment" in
the Critical Accounting Policies and Estimates section of Item 7 in this Annual Report on Form 10-K.
Except for indefinite-lived intangibles, we amortize other intangible assets over the assigned useful lives, each of which is based upon the expected
period to be benefited. We review indefinite-lived intangible assets for impairment annually or sooner if events or changes in circumstances indicate that the
carrying value may not be recoverable. We review finite-lived intangible assets for possible impairment whenever events or changes in circumstances indicate that
the carrying value may not
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be recoverable. In the event conditions change that affect our ability to realize the underlying cash flows associated with our intangible assets, we may record an
impairment charge. As of December 31, 2019, the value of our other intangible assets, net of accumulated amortization, was $850 million.
Our business may be adversely affected by union activities and labor and employment laws.
Certain of our employees are represented by labor unions and other employee representative bodies and work under collective bargaining or similar
agreements, which are subject to periodic renegotiation. From time to time, there have been efforts to organize additional portions of our workforce and those
efforts can be expected to continue. In addition, legislators and government agencies could adopt new regulations, or interpret existing regulations in a manner, that
could make it significantly easier for unionization efforts to be successful. Also, we may in the future be subject to strikes or work stoppages, union and works
council campaigns, and other labor disruptions and disputes. Additional unionization efforts, new collective bargaining or similar agreements, and work stoppages
could materially increase our costs and reduce revenue and could limit our flexibility in terms of work schedules, reductions in force and other operational matters.
We also are subject to laws and regulations that govern such matters as minimum wage, overtime and other working conditions. Some of these laws are
technical in nature and could be subject to interpretation by government agencies and courts different than our interpretations. Efforts to comply with existing laws,
changes to such laws and newly-enacted laws may increase our labor costs and limit our flexibility. If we were found not to be in compliance with such laws, we
could be subject to fines, penalties and liabilities to our employees or government agencies. In addition, efforts to better protect local markets from foreign workers
and decisions of countries to withdraw from treaties and joint economic areas may lead to increased restrictions on the free movement of people and labor and may
limit our ability to place key personnel where they could best serve our needs.
We rely on information technology and communication systems in critical areas of our operations and a disruption relating to such technology could harm our
business.
In the ordinary course of business, we rely upon information technology networks and systems, some of which are leased from third parties, to process,
transmit and store electronic information and to manage and support a variety of business processes and activities. The secure operation of these information
technology networks and the processing and maintenance of this information is critical to our business operations and strategy. Despite security measures and
business continuity plans, our information technology networks and infrastructure may be vulnerable to damage, disruptions or shutdowns due to attacks by cyber
criminals, breaches due to employee error or malfeasance, disruptions during the process of upgrading or replacing computer software or hardware, terminations of
business relationships by third party service providers, power outages, computer viruses, telecommunication or utility failures, terrorist acts, natural disasters or
other catastrophic events. The occurrence of any of these events could compromise our networks, and the information stored there could be accessed, publicly
disclosed, lost or stolen. Any such access, disclosure or loss of information could result in legal claims or proceedings, disruption to our operations and damage to
our reputation, any of which could adversely affect our business. In addition, as security threats continue to evolve, we will likely need to invest additional
resources to protect the security of our systems.
In the event that we decide to switch providers or to implement upgrades or replacements to our own systems, we may be unsuccessful in the
development of our own systems or we may underestimate the costs and expenses of switching providers or developing and implementing our own systems. Also,
our revenue may be hampered during the period of implementing an alternative system, which period could extend longer than we anticipated. We are in the midst
of a systems conversion project for our European businesses, which will be subject to all of these risks.
The costs of complying with the requirements of laws pertaining to the privacy and security of personal information and the potential liability associated with
the failure to comply with such laws could materially adversely affect our business and results of operations.
We collect personally identifiable information ("PII") and other data as part of our business processes and operations. The legislative and regulatory
framework relating to privacy and data protection is rapidly evolving worldwide and is likely to remain uncertain for the foreseeable future. This data is subject to
a variety of U.S. and international laws and regulations. Many foreign countries and governmental bodies, including the European Union, Canada and other
jurisdictions where we conduct business, have laws and regulations concerning the collection and use of PII and other data obtained from their residents or by
businesses operating within their jurisdictions that are more restrictive than those in the U.S. Additionally, the European Union adopted the General Data
Protection Regulation ("GDPR") that will impose more stringent data protection requirements for processors and controllers of personal data, including expanded
disclosures about how PII is to be used, limitations on retention of PII, mandatory data breach notification requirements, and higher standards for data controllers
to demonstrate that they have obtained valid consent for certain data processing activities. The GDPR became effective in May 2018, and there can be no assurance
that we have timely implemented all processes required for full compliance with the regulation. The GDPR provides severe penalties for noncompliance. In
addition, stricter laws in this area are being enacted in certain states in the U.S. and in other countries, and more jurisdictions are likely to follow this trend.
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Any inability, or perceived inability, to adequately address privacy and data protection issues, even if unfounded, or comply with applicable laws,
regulations, policies, industry standards, contractual obligations or other legal obligations (including at newly-acquired companies) could result in additional cost
and liability to us, result in governmental investigations and enforcement actions, give rise to civil litigation, result in damage to our reputation (including the loss
of trust by our customers and employees), inhibit sales, and otherwise adversely affect our business. We also may be subject to these adverse effects if other parties
with whom we do business, including lenders, suppliers, consultants and advisors, violate applicable laws or contractual obligations or suffer a security breach.
Business interruptions in our distribution centers or other facilities may affect our operations, the function of our computer systems, and/or the availability
and distribution of merchandise, which may affect our business.
Weather, terrorist activities, war or other disasters, or the threat of any of them, may result in the closure of our distribution centers or other facilities or
may adversely affect our ability to deliver inventory through our system on a timely basis. This may affect our ability to serve our customers, resulting in lost sales
or a potential loss of customer loyalty. Some of our merchandise is imported from other countries and these goods could become difficult or impossible to bring
into the U.S. or into the other countries in which we operate, and we may not be able to obtain such merchandise from other sources at similar prices. Such a
disruption in revenue could potentially have a negative impact on our results of operations and financial condition.
We are subject to environmental regulations and incur costs relating to environmental matters.
We are subject to various environmental protection and health and safety laws and regulations governing, among other things: the emission and discharge
of hazardous materials into the ground, air, or water; exposure to hazardous materials; and the generation, handling, storage, use, treatment, identification,
transportation, and disposal of industrial by-products, waste water, storm water, and mercury and other hazardous materials. We are also required to obtain
environmental permits from governmental authorities for certain of our operations. If we violate or fail to obtain or comply with these laws, regulations, or permits,
we could be fined or otherwise sanctioned by regulators or lose our operating permits. We could also become liable if employees or other parties are improperly
exposed to hazardous materials. We have an environmental management process designed to facilitate and support our compliance with these requirements; we
cannot assure you, however, that we will at all times be in complete compliance with such requirements.
We have made and will continue to make capital and other expenditures relating to environmental matters. Although we presently do not expect to incur
any capital or other expenditures relating to environmental controls or other environmental matters in amounts that would be material to us, we may be required to
make such expenditures in the future.
Under certain environmental laws, we could be held responsible for all of the costs relating to any contamination at, or migration to or from, our or our
predecessors' past or present facilities and at independent waste disposal sites. These laws often impose liability even if the owner or operator did not know of, or
was not responsible for, the release of such hazardous substances. Many of our facilities are located on or near properties with a history of industrial use that may
have involved hazardous materials. As a result, some of our properties may be contaminated. Some environmental laws hold current or previous owners or
operators of real property liable for the costs of cleaning up contamination. These environmental laws also impose liability on any person who disposes of, treats,
or arranges for the disposal or treatment of hazardous substances, regardless of whether the affected site is owned or operated by such person, and at times can
impose liability on companies deemed under law to be a successor to such person. Third parties may also make claims against owners or operators of properties, or
successors to such owners or operators, for personal injuries and property damage associated with releases of hazardous or toxic substances.
Contamination resulting from vehicle recycling processes can include soil and ground water contamination from the release, storage, transportation, or
disposal of gasoline, motor oil, antifreeze, transmission fluid, chlorofluorocarbons ("CFCs") from air conditioners, other hazardous materials, or metals such as
aluminum, cadmium, chromium, lead, and mercury. Contamination from the refurbishment of chrome plated bumpers can occur from the release of the plating
material. Contamination can migrate on-site or off-site, which can increase the risk, and the amount, of any potential liability.
When we identify a potential material environmental issue during our acquisition due diligence process, we analyze the risks, and, when appropriate,
perform further environmental assessment to verify and quantify the extent of the potential contamination. Furthermore, where appropriate, we have established
financial reserves for certain environmental matters. In the event we discover new information or if laws change, we may incur significant liabilities, which may
exceed our reserves.
Environmental laws are complex, change frequently, and have tended to become more stringent over time. Our costs of complying with current and
future environmental and health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances, may adversely
affect our business, results of operations, or financial condition.
We could be subject to product liability claims and involved in product recalls.
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If customers of repair shops that purchase our products are injured or suffer property damage, we could be subject to product liability claims by such
customers. The successful assertion of this type of claim could have an adverse effect on our business, results of operations or financial condition. In addition, we
may become involved in the recall of a product that is determined to be defective. More generally, a recall involving alternative parts, even if we did not sell the
recalled products, could adversely affect the perceived quality of alternative parts, leading to decreased usage of alternative parts. The expenses of a recall and the
damage to our reputation, or the reputation of alternative parts generally, could have an adverse effect on our business, results of operations or financial condition.
We have agreed to defend and indemnify in certain circumstances insurance companies and customers against claims and damages relating to product
liability and product recalls. The existence of claims or damages for which we must defend and indemnify these parties could also negatively impact our business,
results of operations or financial condition.
Governmental agencies may refuse to grant or renew our operating licenses and permits.
Our operating subsidiaries in our salvage, self-service, and refurbishing operations must obtain licenses and permits from state and local governments to
conduct their operations. When we develop or acquire a new facility, we must seek the approval of state and local units of government. Governmental agencies
may resist the establishment of a vehicle recycling or refurbishing facility in their communities. There can be no assurance that future approvals or transfers will be
granted. In addition, there can be no assurance that we will be able to maintain and renew the licenses and permits our operating subsidiaries currently hold.
Regulations related to conflict-free minerals may force us to incur additional expenses and otherwise adversely impact our business.
In August 2012, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC adopted final rules regarding disclosure of
the use of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo or adjoining countries. These requirements impose
significant burdens on U.S. public companies. Compliance with the rules requires substantial due diligence in an effort to determine whether products contain the
conflict minerals. The results of such due diligence efforts must be disclosed on an annual basis in a filing with the SEC.
Our supply chain is complex and we may incur significant costs to determine the source of any such minerals used in our products. We may also incur
costs with respect to potential changes to products, processes or sources of supply as a consequence of our diligence activities. Further, the implementation of these
rules and their effect on customer, supplier and/or consumer behavior could adversely affect the sourcing, supply and pricing of materials used in our products. As
there may be only a limited number of suppliers offering products free of conflict minerals in some circumstances, we cannot be sure that we will be able to obtain
necessary products from such suppliers in sufficient quantities or at competitive prices. We may face reputational challenges if we determine that certain of our
products contain minerals not determined to be conflict-free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products
through the procedures we implement. Accordingly, these rules could have a material adverse effect on our business, results of operations and/or financial
condition.
If we experience problems with our fleet of trucks and other vehicles, our business could be harmed.
We use a fleet of trucks and other vehicles to deliver the majority of the products we sell. We are subject to the risks associated with providing delivery
services, including inclement weather, disruptions in the transportation infrastructure, governmental regulation, availability and price of fuel, liabilities arising from
accidents to the extent we are not covered by insurance, and insurance premium increases. In addition, our failure to deliver products in a timely and accurate
manner could harm our reputation and brand, which could have a material adverse effect on our business.
We may lose the right to operate at key locations.
We lease most of the properties at which we conduct our businesses. At the end of a lease term, we must negotiate a renewal, exercise a purchase option
(to the extent we have that right), or find a new location. There can be no assurance that we will be able to negotiate renewals on terms acceptable to us or that we
will find a suitable alternative location, especially with respect to our salvage operations (which have characteristics that are often not attractive to landlords, local
governments, or neighbors). In such cases, we may lose the right to operate at key locations.
Our effective tax rate could materially increase as a consequence of various factors, including interpretations and administrative guidance in regard to the Tax
Act (defined below), U.S. and/or international tax legislation, mix of earnings by jurisdiction, and U.S. and foreign jurisdictional audits.
We are a U.S. based multinational company subject to income taxes in the U.S. and a number of foreign jurisdictions. Therefore, we are subject to
changes in tax laws in each of these jurisdictions and such changes could have a material adverse effect on our effective tax rate and cash flows.
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On December 22, 2017, the U.S. enacted legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). Among other things, the Tax Act
reduced the U.S. statutory corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. Additionally, beginning in 2018, the Tax Act
imposed a regime of taxation on foreign subsidiary earnings (Global Intangible Low-Taxed Income, “GILTI”) and on certain related party payments (Base Erosion
Anti-abuse Tax, “BEAT”). Other important changes potentially material to our operations included the full expensing of certain assets placed into service after
September 27, 2017, the repeal of the domestic manufacturing deduction, and additional limitations on the deductibility of executive compensation. Finally, as part
of the transition of U.S. international taxation from a worldwide tax system to a territorial tax system, the Tax Act imposed a one-time transition tax on the deemed
repatriation of historical earnings of foreign subsidiaries as of December 31, 2017.
Many non-U.S. jurisdictions are implementing tax legislation based upon recommendations made by the Organization for Economic Co-operation and
Development in connection with its Base Erosion and Profit Shifting study, as well as certain anti-tax-avoidance initiatives advanced by the European
Commission. The outcome of these legislative developments could have a material adverse effect on our effective tax rate and cash flows.
The tax rates applicable in the jurisdictions within which we operate vary widely. Therefore, our effective tax rate may be adversely affected by changes
in the mix of our earnings by jurisdiction.
We are also subject to ongoing audits of our income tax returns in various jurisdictions both in the U.S. and internationally. While we believe that our tax
positions will be sustained, the outcomes of such audits could result in the assessment of additional taxes, which could adversely impact our cash flows and
financial results.
If significant tariffs or other restrictions are placed on products or materials we import or any related counter-measures are taken by countries to which we
export products, our revenue and results of operations may be materially harmed.
The current U.S. administration has imposed tariffs on certain materials imported into the U.S. from China and announced additional tariffs on other
goods from China and other countries. Moreover, counter-measures have been taken by other countries in retaliation for the U.S.-imposed tariffs. The tariffs cover
products and materials that we import, and the counter-measures may affect products we export. The effects currently are not material; however, depending on the
breadth of products and materials ultimately affected by, and the duration of, the tariffs and countermeasures, our financial results may be materially harmed. In
addition, countries may impose other restrictions on the importation of products. For example, in 2018 China imposed a ban on the importation of various types of
solid waste allegedly in an effort to reduce environmental pollution. This ban includes certain scrap metals that we sell and continues to have the effect of reducing
the prices of such products.
Activist investors could cause us to incur substantial costs, divert management’s attention, and have an adverse effect on our business.
We have in the past received, and we may in the future be subject to, proposals by activist investors urging us to take certain corporate actions. Activist
investor activities could cause our business to be adversely affected because responding to proxy contests and other demands by activist investors can be costly and
time-consuming, disrupt our operations, and divert the attention of management and our employees. For example, we have retained, and may in the future be
required to retain, the services of various professionals to advise us on activist investor matters, including legal, financial and communications advisors, the costs
of which may negatively impact our future financial results. Campaigns by activist investors to effect changes at publicly-traded companies are sometimes led by
investors seeking to increase short term investor value through actions such as financial restructuring, increased debt, special dividends, stock repurchases, or sales
of assets or the entire company. Perceived uncertainties as to our future direction, strategy or leadership that arise as a consequence of activist investor initiatives
may result in the loss of potential business opportunities, harm our ability to attract new investors, employees and business partners, and cause our stock price to
experience periods of volatility or stagnation.
Risks Relating to Our Common Stock and Financial Structure
The market price of our common stock may be volatile and could expose us to securities class action litigation.
The stock market and the price of our common stock may be subject to wide fluctuations based upon general economic and market conditions. The
market price for our common stock may also be affected by our ability to meet analysts’ expectations. Failure to meet such expectations, even slightly, could have
an adverse effect on the market price of our common stock. In addition, stock market volatility has had a significant effect on the market prices of securities issued
by many companies for reasons unrelated to the operating performance of these companies. Downturns in the stock market may cause the price of our common
stock to decline. Additionally, the market price for our common stock has been in the past, and in the future may be, adversely affected by allegations made or
reports issued by short sellers, analysts, activists or others regarding our business model, our management or our financial accounting.
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Following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against such
companies. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources, which
could have an adverse effect on our business.
Delaware law, our charter documents and our loan documents may impede or discourage a takeover, which could affect the price of our stock.
The anti-takeover provisions of our certificate of incorporation and bylaws, our loan documents and Delaware law could, together or separately, impose
various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. Our
certificate of incorporation and bylaws have provisions that could discourage potential takeover attempts and make attempts by stockholders to change
management more difficult. Our credit agreement provides that a change of control is an event of default. Our incorporation under Delaware law and these
provisions could also impede an acquisition, takeover, or other business combination involving us or discourage a potential acquirer from making a tender offer for
our common stock, which, under certain circumstances, could reduce the price of our common stock.
Future sales of our common stock or other securities may depress our stock price.
We and our stockholders may sell shares of common stock or other equity, debt or instruments that constitute an element of our debt and equity
(collectively, "securities") in the future. We may also issue shares of common stock under our equity incentive plan or in connection with future acquisitions. We
cannot predict the size of future issuances of securities or the effect, if any, that future issuances and sales of shares of our common stock or other securities will
have on the price of our common stock. Sales of substantial amounts of common stock (including shares issued in connection with an acquisition), the issuance of
additional debt securities, or the perception that such sales or issuances could occur, may cause the price of our common stock to fall.
We cannot guarantee that our stock repurchase program will be fully implemented.
In October 2018, our Board of Directors approved a stock repurchase program totaling $500 million. In October 2019, our Board of Directors authorized
an increase to our existing stock repurchase program under which the Company may purchase up to an additional $500 million of our common stock, bringing the
authorized total to $1.0 billion. We are not obligated to repurchase a specified number or dollar value of shares, and our repurchase program may be suspended or
terminated at any time.
We have a substantial amount of indebtedness, which could have a material adverse effect on our financial condition and our ability to obtain financing in the
future and to react to changes in our business.
As of December 31, 2019, we had approximately $1.6 billion aggregate principal amount of secured debt outstanding and approximately $1.8 billion of
availability under our credit agreement ($1.9 billion of availability reduced by $69 million of amounts outstanding under letters of credit). In addition, we had
approximately $2.3 billion aggregate principal amount of unsecured debt outstanding comprising $600 million aggregate principal amount of 4.75% senior notes
due May 15, 2023 (the "U.S. Notes (2023)"), €500 million ($561 million) aggregate principal amount of 3.875% senior notes due April 1, 2024 (the "Euro Notes
(2024)"), and €1.0 billion ($1.1 billion) aggregate principal amount consisting of €750 million of 3.625% senior notes due 2026 (the "Euro Notes (2026)") and
€250 million of 4.125% senior notes due 2028 (the "Euro Notes (2028)," together with the 2026 notes, the "Euro Notes (2026/28)," and together with the U.S.
Notes (2023), Euro Notes (2024), and Euro Notes (2026), the "senior notes"). Borrowings under the credit agreement mature in January 2024. On January 10,
2020, we redeemed the U.S. Notes (2023) at a redemption price equal to 101.583% of the principal amount of the U.S. Notes (2023) plus accrued and unpaid
interest.
Our significant amount of debt and our debt service obligations could limit our ability to satisfy our obligations, limit our ability to operate our business
and impair our competitive position.
For example, our debt and our debt service obligations could:
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increase our vulnerability to adverse economic and general industry conditions, including interest rate fluctuations, because a portion of our borrowings
are and will continue to be at variable rates of interest;
require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce the availability of our cash flow
from operations to fund working capital, capital expenditures or other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and industry;
place us at a disadvantage compared to competitors that may have proportionately less debt;
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•
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limit our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants in our debt agreements; and
increase our cost of borrowing.
In addition, if we or our subsidiaries incur additional debt, the risks associated with our substantial leverage and the ability to service such debt would increase.
Our senior notes do not impose any limitations on our ability to incur additional debt or protect against certain other types of transactions.
Although we are subject to our credit agreement for so long as it remains in effect, the indentures governing the senior notes do not restrict the future
incurrence of unsecured indebtedness, guarantees or other obligations. The indentures contain certain limitations on our ability to incur liens on assets and engage
in sale and leaseback transactions. However, these limitations are subject to important exceptions. In addition, the indentures do not contain many other
restrictions, including certain restrictions contained in our credit agreement, including, without limitation, making investments, prepaying subordinated
indebtedness or engaging in transactions with our affiliates.
Our credit agreement will permit, subject to specified conditions and limitations, the incurrence of a significant amount of additional indebtedness. As of
December 31, 2019, we would have been able to incur an additional $1.8 billion of indebtedness under our credit agreement ($1.9 billion of availability reduced by
$69 million of amounts outstanding under letters of credit). If we or our subsidiaries incur additional debt, the risks associated with our substantial leverage and the
need to service such debt would increase.
Our credit agreement imposes significant operating and financial restrictions on us and our subsidiaries, which may prevent us from capitalizing on business
opportunities.
Our credit agreement imposes significant operating and financial restrictions on us. These restrictions limit our ability, among other things, to:
•
•
•
incur, assume or permit to exist additional indebtedness (including guarantees thereof);
pay dividends or certain other distributions on our capital stock or repurchase our capital stock or prepay subordinated indebtedness;
incur liens on assets;
• make certain investments or other restricted payments;
•
•
•
•
engage in transactions with affiliates;
sell certain assets or merge or consolidate with or into other companies;
guarantee indebtedness; and
alter the business we conduct.
As a result of these covenants and restrictions, we will be limited in how we conduct our business and we may be unable to raise additional debt or equity
financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more
restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be
able to obtain waivers from the lenders and/or amend the covenants. The failure to comply with any of these covenants would cause a default under the credit
agreement. A default, if not waived, could result in acceleration of our debt, in which case the debt would become immediately due and payable. If this occurs, we
may not be able to repay our debt or borrow sufficient funds to refinance it. Even if new financing were available, it may be on terms that are less attractive to us
than our existing credit facilities or it may be on terms that are not acceptable to us.
We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our
indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which are
subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we
will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our
cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or
to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet
our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial
liquidity problems and might
24
be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or to
obtain the proceeds that we hope to realize from them, and these proceeds may not be adequate to meet any debt service obligations then due. Any future
refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants which could further restrict our
business operations. Additionally, our credit agreement and the indentures that govern our senior notes limit the use of the proceeds from certain dispositions of our
assets; as a result, our credit agreement and our senior notes may prevent us from using the proceeds from such dispositions to satisfy all of our debt service
obligations.
Our future capital needs may require that we seek to refinance our debt or obtain additional debt or equity financing, events that could have a negative effect
on our business.
We may need to raise additional funds in the future to, among other things, refinance existing debt, fund our existing operations, improve or expand our
operations, respond to competitive pressures, or make acquisitions. From time to time, we may raise additional funds through public or private financing, strategic
alliances, or other arrangements. Funds may not be available or available on terms acceptable to us as a result of different factors, including but not limited to
turmoil in the credit markets that results in the tightening of credit conditions and current or future regulations applicable to the financial institutions from whom
we seek financing. If adequate funds are not available on acceptable terms, we may be unable to meet our business or strategic objectives or compete effectively. If
we raise additional funds by issuing equity securities, stockholders may experience dilution of their ownership interests, and the newly issued securities may have
rights superior to those of our common stock. If we raise additional funds by issuing debt, we may be subject to higher borrowing costs and further limitations on
our operations. If we refinance or restructure our debt, we may incur charges to write off the unamortized portion of deferred debt issuance costs from a previous
financing, or we may incur charges related to hedge ineffectiveness from our interest rate swap obligations. There are restrictions in the indenture that governs the
Euro Notes (2024), Euro Notes (2026) and Euro Notes (2028) on our ability to refinance such notes prior to January 1, 2024, April 1, 2021, and April 1, 2023,
respectively. If we fail to raise capital when needed, our business may be negatively affected.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly and could
affect the value of our senior notes.
Certain borrowings under our credit agreement and the borrowing under our accounts receivable securitization facility are at variable rates of interest and
expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount
borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.
Moreover, changes in market interest rates could affect the trading value of the senior notes. Certain of our variable rate debt, including our revolving credit
facility, currently uses the London Interbank Offered Rate ("LIBOR") as a benchmark for establishing the interest rate. LIBOR is the subject of recent proposals
for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these
developments with respect to LIBOR cannot be entirely predicted but could result in an increase in the cost of our variable rate debt. Assuming all revolving loans
were fully drawn and no interest rate swaps were in place, each one percentage point change in interest rates would result in a $36 million change in annual cash
interest expense under our credit agreement and our accounts receivable securitization facility.
Repayment of our indebtedness, including our senior notes, is dependent on cash flow generated by our subsidiaries.
We are a holding company and repayment of our senior notes will be dependent upon cash flow generated by our subsidiaries and their ability to make
such cash available to us, by dividend, debt repayment or otherwise. Unless they are borrowers or guarantors of the indebtedness, our subsidiaries do not have any
obligation to pay amounts due on the indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or be permitted to, make
distributions to enable us to make payments in respect of our indebtedness, including the senior notes. Each of our subsidiaries is a distinct legal entity and, under
certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries and, under certain circumstances, distributions
from our subsidiaries may be subject to taxes that reduce the amount of such distributions available to us. While the indentures governing the senior notes limit the
ability of our subsidiaries to restrict the payment of dividends or to restrict other intercompany payments to us, these limitations are subject to certain qualifications
and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our
indebtedness, including the senior notes.
A downgrade in our credit rating would impact our cost of capital and could impact the market value of our senior notes.
Credit ratings have an important effect on our cost of capital. Credit rating agencies rate our debt securities on factors that include, among other items, our
results of operations, business decisions that we make, their view of the general outlook for our industry, and their view of the general outlook for the economy.
Actions taken by the rating agencies can include maintaining, upgrading, or downgrading the current rating or placing us on a watch list for possible future
downgrading. We believe our current credit ratings enhance our ability to borrow funds at favorable rates. A downgrade in our current credit rating from a rating
agency could adversely affect our cost of capital by causing us to pay a higher interest rate on borrowed
25
funds under our credit facilities. A downgrade could also adversely affect the market price and/or liquidity of our senior notes, preventing a holder from selling the
senior notes at a favorable price, as well as adversely affecting our ability to issue new notes in the future or incur other indebtedness upon favorable terms.
The right to receive payments on the senior notes is effectively junior to those lenders who have a security interest in our assets.
Our obligations under our senior notes and our guarantors’ obligations under their guarantees of the senior notes are unsecured, but our and each co-
borrower’s obligations under our credit agreement and each guarantor’s obligations under their respective guarantees of the credit agreement are secured by a
security interest in substantially all of our domestic tangible and intangible assets, including the stock of most of our wholly-owned United States subsidiaries and
the stock of certain of our non-United States subsidiaries. If we are declared bankrupt or insolvent, or if we default under our credit agreement, the lenders could
declare all of the funds borrowed thereunder, together with accrued interest, immediately due and payable. If we were unable to repay such indebtedness, the
lenders could foreclose on the pledged assets to the exclusion of holders of our senior notes, even if an event of default exists under the applicable indenture
governing the senior notes. Furthermore, if the lenders foreclose and sell the pledged equity interests in any subsidiary guarantor under our senior notes, then that
guarantor will be released from its guarantee of the senior notes automatically and immediately upon such sale. In any such event, because the senior notes are not
secured by any of our assets or the equity interests in subsidiary guarantors, it is possible that there would be no assets remaining from which claims by holders of
the senior notes could be satisfied or, if any assets remained, they might be insufficient to satisfy claims fully. As of December 31, 2019, we had approximately
$1.6 billion aggregate principal amount of secured debt outstanding and approximately $1.8 billion of availability under our credit agreement ($1.9 billion of
availability reduced by $69 million of amounts outstanding under letters of credit).
United States federal and state statutes allow courts, under specific circumstances, to void the senior notes and the guarantees, subordinate claims in respect of
the senior notes and the guarantees, and require holders of the senior notes to return payments received from us or the guarantors.
Our direct and indirect domestic subsidiaries that are obligors under the credit agreement guarantee the obligations under our senior notes. In addition,
certain subsidiaries of the issuer of the Euro Notes (2024) guarantee the obligations under the Euro Notes (2024). The issuance of our senior notes and the issuance
of the guarantees by the guarantors may be subject to review under state and federal laws if a bankruptcy, liquidation or reorganization case or a lawsuit, including
in circumstances in which bankruptcy is not involved, were commenced at some future date by, or on behalf of, our unpaid creditors or the unpaid creditors of a
guarantor. Under the federal bankruptcy laws of the United States and comparable provisions of state fraudulent transfer laws, a court may avoid or otherwise
decline to enforce the senior notes, or a guarantor’s guarantee, or may subordinate the senior notes, or such guarantee, to our or the applicable guarantor’s existing
and future indebtedness. While the relevant laws may vary from jurisdiction to jurisdiction, a court might do so if it found that when indebtedness under the senior
notes was issued, or when the applicable guarantor entered into its guarantee, or, in some jurisdictions, when payments became due under the senior notes, or such
guarantee, the issuer or the applicable guarantor received less than reasonably equivalent value or fair consideration and:
•
•
•
was insolvent or rendered insolvent by reason of such incurrence;
was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital; or
intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.
A court would likely find that we or a guarantor did not receive reasonably equivalent value or fair consideration for the senior notes or such guarantee if
we or such guarantor did not substantially benefit directly or indirectly from the issuance of the senior notes. Thus, if the guarantees were legally challenged, any
guarantee could be subject to the claim that, since the guarantee was incurred for our benefit, and only indirectly for the benefit of the guarantor, the obligations of
the applicable guarantor were incurred for less than reasonably equivalent value or fair consideration. If a court were to void the issuance of the senior notes or any
guarantee, a holder of the senior notes would no longer have any claim against us or the applicable guarantor. In the event of a finding that a fraudulent transfer or
conveyance occurred, a holder of the senior notes may not receive any repayment on the senior notes. Further, the avoidance of the senior notes could result in an
event of default with respect to our and our subsidiaries’ other debt, which could result in acceleration of that debt. The measures of insolvency for purposes of
these fraudulent transfer laws vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however,
an issuer or a guarantor, as applicable, would be considered insolvent if:
•
•
•
the sum of its debts, including contingent liabilities, was greater than the fair value of its assets;
the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including
contingent liabilities, as they become absolute and mature; or
it could not pay its debts as they become due.
26
A court might also void the senior notes, or a guarantee, without regard to the above factors, if the court found that the senior notes were incurred or
issued or the applicable guarantor entered into its guarantee with actual intent to hinder, delay or defraud its creditors. We cannot give any assurance as to what
standard a court would apply in determining whether we or the guarantors were solvent at the relevant time or that a court would agree with our conclusions in this
regard, or, regardless of the standard that a court uses, that it would not determine that we or a guarantor were indeed insolvent on that date; that any payments to
the holders of the senior notes (including under the guarantees) did not constitute preferences, fraudulent transfers or conveyances on other grounds; or that the
issuance of the senior notes and the guarantees would not be subordinated to our or any guarantor’s other debt. In addition, any payment by us or a guarantor
pursuant to the senior notes, or its guarantee, could be avoided and required to be returned to us or such guarantor or to a fund for the benefit of our or such
guarantor’s creditors, and accordingly the court might direct holders of the senior notes to repay any amounts already received from us or such guarantor. Among
other things, under U.S. bankruptcy law, any payment by us pursuant to the senior notes or by a guarantor under a guarantee made at a time we or such guarantor
were found to be insolvent could be voided and required to be returned to us or such guarantor or to a fund for the benefit of our or such guarantor’s creditors if
such payment is made to an insider within a one-year period prior to a bankruptcy filing or within 90 days for any outside party and such payment would give such
insider or outsider party more than such party would have received in a distribution under the Bankruptcy Code in a hypothetical Chapter 7 case. Although each
guarantee contains a “savings clause” intended to limit the subsidiary guarantor’s liability to the maximum amount that it could incur without causing the
incurrence of obligations under its subsidiary guarantee to be a fraudulent transfer, this provision may not be effective as a legal matter to protect any subsidiary
guarantees from being avoided under fraudulent transfer law. In that regard, in Official Committee of Unsecured Creditors of TOUSA, Inc. v Citicorp North
America, Inc., the United States Bankruptcy Court in the Southern District of Florida held that a savings clause similar to the savings clause included in our
indentures was unenforceable. As a result, the subsidiary guarantees were found to be fraudulent conveyances. The United States Court of Appeals for the Eleventh
Circuit subsequently affirmed the liability findings of the Bankruptcy Court without ruling directly on the enforceability of savings clauses generally. If the
decision of the bankruptcy court in TOUSA were followed by other courts, the risk that the guarantees would be deemed fraudulent conveyances would be
significantly increased.
To the extent a court avoids the senior notes or any of the guarantees as fraudulent transfers or holds the senior notes or any of the guarantees
unenforceable for any other reason, the holders of the senior notes would cease to have any direct claim against us or the applicable guarantor. If a court were to
take this action, our or the applicable guarantor’s assets would be applied first to satisfy our or the applicable guarantor’s other liabilities, if any, and might not be
applied to the payment of the senior notes. Sufficient funds to repay the senior notes may not be available from other sources, including the remaining guarantors,
if any. In addition, the Euro Notes (2024) and the related guarantees may be subject to avoidance under the laws of foreign jurisdictions, including Italy and Czech
Republic, to the extent that we, the issuer of the Euro Notes (2024), or any of the guarantors (as applicable) were to be the subject of an insolvency or related
proceeding in such jurisdiction(s).
Not all of our subsidiaries have guaranteed our credit agreement or our senior notes, and the assets of our non-guarantor subsidiaries may not be available to
make payments on such obligations.
Not all of our subsidiaries have guaranteed the credit agreement, our U.S. Notes (2023), Euro Notes (2024), Euro Notes (2026), and Euro Notes (2028). In
the event that any non-guarantor subsidiary becomes insolvent, liquidates, reorganizes, dissolves or otherwise winds up, holders of its indebtedness and its trade
creditors generally will be entitled to payment on their claims from the assets of that subsidiary before any of those assets are made available to the lenders under
the credit agreement or the holders of the senior notes. Consequently, claims in respect of the credit agreement and the senior notes are structurally subordinated to
all of the liabilities of our subsidiaries that are not guarantors of such instruments, including trade payables, and any claims of third party holders of preferred
equity interests, if any, in our non-guarantor subsidiaries. For the year ended December 31, 2019, our subsidiaries that are not borrowers under or do not guarantee
the credit agreement and our subsidiaries that do not guarantee the U.S. Notes (2023) represented approximately 51% and 30% of our total revenue and operating
income, respectively. In addition, these non-guarantor subsidiaries represented approximately 54% and 55% of our total assets and total liabilities, respectively, as
of December 31, 2019 (excluding, in each case, intercompany amounts). As of the same date, our subsidiaries that do not guarantee the credit agreement or the
U.S. Notes (2023) had approximately $2.5 billion of outstanding indebtedness (which includes $662 million of borrowings under our revolving credit facilities by
foreign subsidiaries that are borrowers under the revolving credit facilities but that do not guarantee the U.S. Notes (2023)). The group of subsidiaries that does not
guarantee the Euro Notes (2024) is similar to the group that does not guarantee the U.S. Notes (2023), Euro Notes (2026) and Euro Notes (2028), except that, in
addition to the issuer of the Euro Notes (2024), there are four subsidiaries in the group that do not guarantee the U.S. Notes (2023), Euro Notes (2026) and Euro
Notes (2028) that guarantee the Euro Notes (2024).
We may not be able to repurchase the senior notes upon a change of control or pursuant to an asset sale offer.
Upon a change of control, as defined in the indentures governing the senior notes, the holders of the senior notes will have the right to require us to offer
to purchase all of the senior notes then outstanding at a price equal to 101% of their
27
principal amount plus accrued and unpaid interest. Such a change of control would also be an event of default under our credit agreement. In order to obtain
sufficient funds to pay amounts due under the credit agreement and the purchase price of the outstanding senior notes, we expect that we would have to refinance
our indebtedness. We cannot assure you that we would be able to refinance our indebtedness on reasonable terms, if at all. Our failure to offer to purchase all
outstanding senior notes or to purchase all validly tendered senior notes would be an event of default under the indenture. Such an event of default may cause the
acceleration of our other debt. Our other debt also may contain restrictions or repayment requirements with respect to specified events or transactions that
constitute a change of control under the indenture.
The definition of change of control in the indentures governing the senior notes includes a phrase relating to the sale of “all or substantially all” of our
assets. There is no precise established definition of the phrase “substantially all” under applicable law. Accordingly, the ability of a holder of senior notes to require
us to repurchase its senior notes as a result of a sale of less than all our assets to another person may be uncertain.
In addition, in certain circumstances as specified in the indentures governing the senior notes, we will be required to commence an asset sale offer, as
defined in the indentures governing the senior notes, pursuant to which we will be obligated to purchase certain senior notes at a price equal to 100% of their
principal amount plus accrued and unpaid interest with the proceeds we receive from certain asset sales. Our other debt may contain restrictions that would limit or
prohibit us from completing any such asset sale offer. In particular, our credit agreement contains provisions that require us, upon the sale of certain assets, to
apply all of the proceeds from such asset sale to the prepayment of amounts due under the credit agreement. The mandatory prepayment obligations under the
credit agreement will be effectively senior to our obligations to make an asset sale offer with respect to the senior notes under the terms of the indentures governing
the senior notes. Our failure to purchase any such senior notes when required under the indentures would be an event of default under the indentures.
Key terms of the senior notes will be suspended if the notes achieve investment grade ratings and no default or event of default has occurred and is continuing.
Many of the covenants in the indentures governing the senior notes will be suspended if the senior notes are rated investment grade by Standard & Poor’s
and Moody’s provided at such time no default or event of default has occurred and is continuing, including those covenants that restrict, among other things, our
ability to pay dividends, incur liens and to enter into certain other transactions. There can be no assurance that the senior notes will ever be rated investment grade.
However, suspension of these covenants would allow us to engage in certain transactions that would not be permitted while these covenants were in force
(although provisions under our other debt, like the credit agreement, may continue to restrict us from engaging in these transactions), and the effects of any such
transactions will be permitted to remain in place even if the senior notes are subsequently downgraded below investment grade.
The liquidity and market value of the senior notes may change due to a variety of factors.
The liquidity of any trading market in the senior notes, and the market price quoted for the senior notes, may be adversely affected by changes in the
overall market for these types of securities, changes in interest rates, changes in our ratings, and changes in our financial performance or prospects or in the
prospects for companies in our industries generally.
We rely on an accounts receivable securitization program for a portion of our liquidity.
We have an arrangement whereby we sell an interest in a portion of our accounts receivable to a special purpose vehicle and receive funding through the
commercial paper market. This arrangement expires in November 2021. In the event that the market for commercial paper were to close or otherwise become
constrained, our cost of credit relative to this program could rise, or credit could be unavailable altogether.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our properties are described in Item 1 of this Annual Report on Form 10-K, and such description is incorporated by reference into this Item 2. Our
properties are sufficient to meet our present needs, and we do not anticipate any difficulty in securing additional space to conduct operations or additional office
space, as needed, on terms acceptable to us.
ITEM 3. LEGAL PROCEEDINGS
On May 10, 2018, our Specialty segment received a Notice of Violation from the U.S. Environmental Protection Agency ("EPA") alleging that certain
performance-related parts that we sold between January 1, 2015 and October 15, 2017
28
violated the provisions of the Clean Air Act that prohibit the sale of parts that could alter or defeat the emission control system of a vehicle. We are in negotiations
with the EPA to resolve this matter, which may involve the payment of a civil penalty. Any penalty that is likely to be imposed is not expected to have material
effect on our financial position, results of operations or cash flows.
In addition, we are from time to time subject to various claims and lawsuits incidental to our business. In the opinion of management, currently
outstanding claims and suits will not, individually or in the aggregate, have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
29
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock is traded on the NASDAQ Global Select Market ("NASDAQ") under the symbol "LKQ." At December 31, 2019, there were 16 record
holders of our common stock.
We have not paid any cash dividends on our common stock. We intend to continue to retain our earnings to finance our growth, repurchase stock through
our stock repurchase program, and for general corporate purposes. We do not anticipate paying any cash dividends on our common stock in the foreseeable future.
In addition, our senior secured credit agreement and our senior notes indentures contain, and future financing agreements may contain, limitations on payment of
cash dividends or other distributions of assets. Delaware law also imposes restrictions on dividend payments. Based on limitations in effect under our senior
secured credit agreement and senior notes indentures, the maximum amount of dividends we could pay as of December 31, 2019 was approximately $1.9
billion. The limit on the payment of dividends is calculated using historical financial information and will change from period to period.
Stock Performance Graph and Cumulative Total Return
The following graph compares the percentage change in the cumulative total returns on our common stock, the Standard & Poor's 500 Stock Index ("S&P
500 Index") and the following group of peer companies (the "Peer Group"): Copart, Inc.; O'Reilly Automotive, Inc.; Genuine Parts Company; and Fastenal Co., for
the period beginning on December 31, 2014 and ending on December 31, 2019 (which was the last day of our 2019 fiscal year). The stock price performance in the
graph is not necessarily indicative of future stock price performance. The graph assumes that the value of an investment in each of the Company's common stock,
the S&P 500 Index and the Peer Group was $100 on December 31, 2014 and that all dividends, where applicable, were reinvested.
Comparison of Cumulative Return
Among LKQ Corporation, the S&P 500 Index and the Peer Group
30
LKQ Corporation
S&P 500 Index
Peer Group
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
$
$
$
100 $
100 $
100 $
105 $
101 $
113 $
109 $
114 $
128 $
145 $
138 $
123 $
84 $
132 $
158 $
127
174
208
This stock performance information is "furnished" and shall not be deemed to be "soliciting material" or subject to Rule 14A, shall not be deemed "filed"
for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, and shall not be deemed incorporated by
reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date of this report and
irrespective of any general incorporation by reference language in any such filing, except to the extent that it specifically incorporates the information by reference.
Issuer Purchases of Equity Securities
On October 25, 2018, our Board of Directors authorized a stock repurchase program under which we were authorized to purchase up to $500 million of
our common stock from time to time through October 25, 2021. 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. Delaware law imposes restrictions on stock repurchases.
On October 25, 2019, our Board of Directors authorized an increase to our existing stock repurchase program under which the Company may purchase up
to an additional $500 million of our common stock from time to time through October 25, 2022; this extended date also applies to the original repurchase program.
With the increase, the Board of Directors has authorized a total of $1.0 billion of common stock repurchases.
During the year ended December 31, 2019, we repurchased 10.9 million shares of common stock for an aggregate price of $292 million. There were no
stock repurchases during the three months ended December 31, 2019. As of December 31, 2019, there was a total of $648 million of remaining capacity under our
repurchase program.
Securities Authorized for Issuance Under Equity Compensation Plans
Information about our common stock that may be issued under our equity compensation plans as of December 31, 2019 included in Part III, Item 12 of
this Annual Report on Form 10-K is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7 of this Annual Report on Form 10-K and our consolidated financial statements and related notes included in Item 8 of this Annual
Report on Form 10-K.
31
(in thousands, except per share data)
Statements of Income Data:
Revenue
Cost of goods sold
Gross margin
Operating income (6) (7)
Other expense (income):
Interest expense
(Gain) loss on debt extinguishment
Interest income and other income, net
Income from continuing operations before
provision for income taxes
Provision for income taxes
Equity in (losses) earnings of unconsolidated
subsidiaries (8)
Income from continuing operations
Net income (loss) from discontinued operations
Net income
Less: net income (loss) attributable to continuing
noncontrolling interest
Less: net income attributable to discontinued
noncontrolling interest
Net income attributable to LKQ stockholders
Basic earnings per share: (9)
Income from continuing operations
Net income (loss) from discontinued
operations
Net income
Less: net income (loss) attributable to
continuing noncontrolling interest
Less: net income attributable to discontinued
noncontrolling interest
Net income attributable to LKQ
stockholders
Diluted earnings per share: (9)
Income from continuing operations
Net income (loss) from discontinued
operations
Net income
Less: net income (loss) attributable to
continuing noncontrolling interest
Less: net income attributable to discontinued
noncontrolling interest
Net income attributable to LKQ
stockholders
$
$
$
$
$
2019
(1)
2018
(2)
2017
(3)
2016
(4)
2015
(5)
Year Ended December 31,
$
12,506,109 $
11,876,674 $
9,736,909 $
8,584,031 $
7,654,315
4,851,794
896,643
7,301,817
5,937,286
4,574,857
3,799,623
882,241
844,998
5,232,328
3,351,703
763,398
541,260 $
480,118 $
533,744 $
463,975 $
423,223
138,504
(128)
(32,755)
791,022
215,330
(32,277)
543,415
1,619
545,034
146,377
1,350
(8,917)
743,431
191,395
(64,471)
487,565
(4,397)
483,168
101,640
456
(23,725)
766,627
235,560
5,907
536,974
(6,746)
530,228
2,800
3,050
(3,516)
974
—
—
88,263
26,650
(28,796)
677,281
220,566
(592)
456,123
7,852
463,975
—
—
1.75 $
1.55 $
1.74 $
1.49 $
0.01
1.76
0.01
0.00
(0.01)
1.54
0.01
—
(0.02)
1.72
(0.01)
—
0.03
1.51
—
—
1.75 $
1.53 $
1.73 $
1.51 $
1.75 $
1.54 $
1.73 $
1.47 $
0.01
1.75
0.01
0.00
(0.01)
1.53
0.01
—
(0.02)
1.71
(0.01)
—
0.03
1.50
—
—
1.74 $
1.52 $
1.72 $
1.50 $
7,192,633
4,359,104
2,833,529
704,627
57,860
—
(2,263)
649,030
219,703
(6,104)
423,223
—
423,223
—
—
1.39
—
1.39
—
—
1.39
1.38
—
1.38
—
—
1.38
304,722
307,496
Weighted average shares outstanding-basic
Weighted average shares outstanding-diluted
310,155
310,969
314,428
315,849
308,607
310,649
306,897
309,784
32
(in thousands)
Other Financial Data:
2019
(1)
2018
(2)
2017
(3)
2016
(4)
2015
(5)
Year Ended December 31,
Net cash provided by operating activities
$
1,064,033 $
710,739 $
518,900 $
635,014 $
Net cash used in investing activities
(264,853)
(1,458,939)
(384,595)
(1,709,928)
Net cash (used in) provided by financing
activities
Capital expenditures
Cash paid for acquisitions, net of cash and
restricted cash acquired
Depreciation and amortization
Balance Sheet Data:
Total assets (10)
Working capital (11)
Long-term obligations, including current portion
Total Company stockholders' equity
(600,669)
(265,730)
(27,296)
314,406
882,995
(250,027)
(1,214,995)
294,077
(112,567)
(179,090)
(513,088)
230,203
1,225,737
(207,074)
(1,349,339)
206,086
$
12,779,956 $
11,393,402 $
9,366,872 $
8,303,199 $
2,491,505
4,041,756
5,008,876
2,830,601
4,310,500
4,782,298
2,499,410
3,403,980
4,198,169
2,045,273
3,341,771
3,442,949
544,282
(329,993)
(238,537)
(170,490)
(160,517)
128,192
5,647,837
1,588,742
1,584,702
3,114,682
(1) Includes the results of operations of seven businesses from their respective acquisition dates in 2019.
(2)
Includes the results of operations of Stahlgruber, from its acquisition effective May 30, 2018, and 13 other businesses from their respective acquisition
dates in 2018.
(3)
Includes the results of operations of 26 businesses from their respective acquisition dates in 2017.
(4)
Includes the results of operations of: (i) Rhiag, from its acquisition effective March 18, 2016; (ii) the aftermarket automotive glass distribution business of
Pittsburgh Glass Works LLC ("PGW autoglass"), from its acquisition effective April 21, 2016; and (iii) 13 other businesses from their respective
acquisition dates in 2016.
(5)
Includes the results of operations of 18 businesses from their respective acquisition dates in 2015.
(6) Reflects $47 million of impairment charges on net assets held for sale for the year ended December 31, 2019. See "Net Assets Held for Sale" in Note 4,
"Summary of Significant Accounting Policies," for further information.
(7) Reflects a $33 million goodwill impairment charge on the Aviation reporting unit for the year ended December 31, 2018. See "Intangible Assets" in Note
4, "Summary of Significant Accounting Policies," for further information.
(8) Reflects impairment charges in 2019 and 2018 of $40 million and $71 million, respectively, related to the Mekonomen equity investment. See
"Investments in Unconsolidated Subsidiaries" in Note 4, "Summary of Significant Accounting Policies," for further information.
(9) The sum of the individual earnings per share amounts may not equal the total due to rounding.
(10) Refer to "Recent Accounting Pronouncements–Adoption of New Lease Standard" in Note 4, "Summary of Significant Accounting Policies," for the
increase in total assets compared to December 31, 2018 as a result of the adoption of the new lease standard.
(11) Working capital amounts represent current assets less current liabilities, excluding assets and liabilities of discontinued operations.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
33
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 the United Kingdom, Germany, the Benelux region (Belgium, Netherlands, and Luxembourg), Italy, Czech Republic,
Poland, Slovakia, Austria, 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. We aggregate our Wholesale – North
America and Self Service operating segments into one reportable segment, North America, resulting in three reportable segments: North America, Europe and
Specialty.
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. We have pursued acquisitions that we
believe will help drive profitability, cash flow and stockholder value. We target companies that are market leaders, will expand our geographic presence and will
enhance our ability to provide a wide array of vehicle products to our customers through our distribution network.
During 2019, we completed seven acquisitions for a total consideration of $63 million, including three wholesale businesses and one self service business
in North America, and three wholesale businesses in Europe.
On May 30, 2018, we acquired Stahlgruber, a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital
equipment and accessories with operations in Germany, Austria, Italy, Slovenia, and Croatia with further sales to Switzerland. This acquisition expanded LKQ's
geographic presence in continental Europe and serves as an additional strategic hub for our European operations. In addition, this acquisition should allow for
continued improvement in procurement, logistics and infrastructure optimization.
On July 3, 2017, we acquired four parts distribution businesses in Belgium. These companies were acquired with the objective of transforming the
existing three-step distribution model in Belgium to a two-step distribution model to align with our Netherlands operations.
On November 1, 2017, we acquired the aftermarket business of Warn, a leading designer, manufacturer and marketer of high performance vehicle
equipment and accessories. This acquisition expanded LKQ's presence in the specialty market and created viable points of entry into related markets.
On April 21, 2016, we acquired PGW, a leading global distributor and manufacturer of automotive glass products. PGW’s business comprised
aftermarket automotive replacement glass distribution services and automotive glass manufacturing. On March 1, 2017, we sold the automotive glass
manufacturing component of PGW. Unless otherwise noted, the discussion related to PGW throughout Part II, Item 7 of this Annual Report on Form 10-K refers to
the aftermarket glass distribution operations of PGW, PGW autoglass, which is included within continuing operations. See Note 3, "Discontinued Operations" in
Item 8 of this Annual Report on Form 10-K for further information related to our discontinued operations. The acquisition of PGW autoglass expanded our
addressable market in North America and provided distribution synergies with our existing network.
34
In October 2016, we acquired substantially all of the business assets of Andrew Page Limited ("Andrew Page"), a distributor of aftermarket automotive
parts in the United Kingdom. The U.K. Competition and Markets Authority ("CMA") concluded its review of this acquisition on October 31, 2017 and required us
to divest less than 10% of the acquired locations. We divested the required locations during 2018.
In addition to the significant acquisitions mentioned above, during the years ended December 31, 2019, 2018, and 2017, we acquired various smaller
businesses across our North America, Europe, and Specialty segments.
On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen AB ("Mekonomen"), the leading independent car parts and service chain in the
Nordic region of Europe, offering a wide range of quality products including spare parts and accessories for cars, and workshop services for consumers and
businesses. We acquired additional shares in the fourth quarter of 2018, increasing our equity interest to 26.6%. We are accounting for our interest in Mekonomen
using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over the investee.
See Note 2, "Business Combinations" and "Investments in Unconsolidated Subsidiaries" in Note 4, "Summary of Significant Accounting Policies," to
the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to our acquisitions and 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 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, diagnostic and repair services, and processing fees related to the secure disposal of vehicles. During the year ended December 31, 2019,
parts and services revenue represented approximately 95% of our consolidated revenue. Revenue from other sources includes scrap 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 5, "Revenue Recognition" to the consolidated financial statements in Part II, Item 8 of
this Annual Report on Form 10-K for additional information related to our sources of revenue.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements
requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, assumptions, and judgments, including those related to revenue recognition,
inventory valuation, business combinations and goodwill impairment. We base our estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities
and our recognition of revenue. Actual results may differ from these estimates.
Revenue Recognition
For information regarding our critical accounting policies related to revenue, refer to Note 5, "Revenue Recognition," to the consolidated financial
statements in Part II, Item 8 of this Annual Report on Form 10-K.
Inventory Accounting
For all inventory, carrying value is recorded at the lower of cost or net realizable value. Net realizable value can be influenced by current anticipated
demand. If actual demand differs from our estimates, additional reductions to inventory carrying value would be necessary in the period such determination is
made.
For all of our aftermarket products, excluding our aftermarket automotive glass products, cost is established based on the average price we pay for parts;
for our aftermarket automotive glass products inventory, cost is established using the first-in first-out method. Inventory cost for all of our aftermarket products
includes expenses incurred for freight in and overhead costs; for items purchased from foreign companies, import fees and duties and transportation insurance are
also included. Refurbished inventory cost is based upon the average price we pay for cores. The cost of our refurbished inventory also includes expenses incurred
for freight in, labor and other overhead costs. Our salvage inventory cost is established based upon the price we pay for a vehicle, including auction, towing and
storage fees, as well as expenditures for buying and dismantling vehicles. Inventory carrying value is determined using the average cost to sales percentage at each
of our facilities and applying that percentage to the facility's inventory at expected selling prices, the assessment of which incorporates the sales probability based
35
on a part's days in stock and historical demand. The average cost to sales percentage is derived from each facility's historical profitability for salvage vehicles.
Remanufactured inventory cost is based upon the price paid for cores, and also includes expenses incurred for freight, direct manufacturing costs and overhead
related to our remanufacturing operations. The cost of manufactured product inventory is established using the first-in first-out method.
Lease Accounting
On January 1, 2019, we adopted Accounting Standards Update 2016-02, "Leases" ("ASU 2016-02"), which represents the FASB Accounting Standards
Codification Topic 842 ("ASC 842"). We adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases
existing at the date of initial application with no restatement of comparative periods. The most significant impact was the recognition of lease assets and liabilities
for operating leases. Refer to “Recent Accounting Pronouncements–Adoption of New Lease Standard” in Note 4, "Summary of Significant Accounting Policies”
and Note 13, "Leases” to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding the
adoption of the new lease standard and our critical accounting policies related to leases.
Business Combinations
We record our acquisitions using the purchase method of accounting, under which the acquisition purchase price is allocated to the assets acquired and
liabilities assumed based upon their respective fair values. We utilize management estimates and, in some instances, independent third party valuation firms to
assist in determining the fair values of assets acquired, liabilities assumed and contingent consideration granted. There are inherent assumptions and estimates used
in developing the future cash flows and fair values of tangible and intangible assets, such as projecting revenues and profits, discount rates, income tax rates,
royalty rates, customer attrition rates and other various valuation assumptions. We use various valuation methods to value property, plant and equipment. When
valuing real property, we typically use the sales comparison approach for land and the income approach for buildings and building improvements. When valuing
personal property, we typically use either the income or cost approach. We used the relief-from-royalty method to value trade names, trademarks, software and
other technology assets, and we used the multi-period excess earnings method to value customer relationships. The relief-from-royalty method assumes that the
intangible asset has value to the extent that its owner is relieved of the obligation to pay royalties for the benefits received from the intangible asset. The multi-
period excess earnings method is based on the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting
contributory asset charges.
Goodwill and Indefinite-Lived Intangibles Impairment
We are required to test our goodwill and indefinite-lived intangible assets for impairment at least annually. When testing goodwill for impairment, we are
required to evaluate events and circumstances that may affect the performance of the reporting unit and the extent to which the events and circumstances may
impact the future cash flows of the reporting unit to determine whether the fair value of the assets exceeds the carrying value. Developing the estimated future cash
flows and fair value of the reporting unit requires management's judgment in projecting revenues and profits, allocation of shared corporate costs, tax rates, capital
expenditures, working capital requirements, discount rates and market multiples. Many of the factors used in assessing fair value are outside the control of
management, and it is reasonably likely that assumptions and estimates can change in future periods. If these assumptions or estimates change in the future, we
may be required to record impairment charges for these assets. In response to changes in industry and market conditions, we may be required to strategically
realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill.
We perform goodwill impairment tests annually in the fourth quarter and between annual tests whenever events indicate that an impairment may exist.
During 2019, we did not identify any events or changes in circumstances that would more likely than not reduce the fair value of our reporting units below their
carrying amounts. Therefore, we did not perform any impairment tests other than our annual test in the fourth quarter as of October 31, 2019.
Our goodwill impairment assessment is performed by reporting unit. A reporting unit is an operating segment, or a business one level below an operating
segment (the "component" level), for which discrete financial information is prepared and regularly reviewed by segment management. However, components are
aggregated as a single reporting unit if they have similar economic characteristics. For the purpose of aggregating our components into reporting units, we review
the long-term performance of Segment EBITDA. Additionally, we review qualitative factors such as type or class of customers, nature of products, distribution
methods, inventory procurement methods, level of integration, and interdependency of processes across components. Our assessment of the aggregation includes
both qualitative and quantitative factors and is based on the facts and circumstances specific to the components.
We have four operating segments: Wholesale – North America, Europe, Specialty and Self Service. Each of these operating segments consists of multiple
components that have discrete financial information available that is reviewed by
36
segment management on a regular basis. We have evaluated these components and concluded that the components that compose the Wholesale – North America,
Europe, Specialty, and Self Service operating segments are economically similar and thus were aggregated into four separate reporting units for our 2019 annual
goodwill impairment test.
Our goodwill would be considered impaired if the carrying value of a reporting unit exceeded its estimated fair value. The fair value estimates are
established using weightings of the results of a discounted cash flow methodology and a comparative market multiples approach. We believe that using two
methods to determine fair value limits the chances of an unrepresentative valuation. Discount rates, growth rates and cash flow projections are the assumptions that
are most sensitive and susceptible to change as they require significant management judgment. Impairment may result from, among other things, deterioration in
the performance of acquired businesses, increases in our cost of capital, adverse market conditions, and adverse changes in applicable laws or regulations,
including modifications that restrict the activities of the acquired business. To assess the reasonableness of the fair value estimates, we compare the sum of the
reporting units’ fair values to the Company’s market capitalization and calculate an implied control premium, which is then evaluated against recent market
transactions in our industry. If we were required to recognize goodwill impairments, we would report those impairment losses as part of our operating results.
We determined no impairments existed when we performed our annual goodwill impairment testing in 2019 on all four reporting units as each of those
reporting units had a fair value estimate that exceeded the carrying value by at least 25%. As of December 31, 2019, we had a total of $4.4 billion in goodwill
subject to future impairment tests.
Based on our annual goodwill impairment test in the fourth quarter of 2018, we determined the carrying value of our Aviation reporting unit exceeded the
fair value estimate by more than the carrying value, thus we recorded an impairment charge of $33 million, which represented the total carrying value of goodwill
in our Aviation reporting unit. The impairment charge was due to a decrease in the fair value estimate from the prior year fair value estimate, primarily driven by a
significant deterioration in the outlook for the Aviation reporting unit due to competition, customer financial issues and changing market conditions for the airplane
platforms that the business services, which lowered our projected gross margin and related future cash flows. We reported the impairment charge in Impairment of
net assets held for sale and goodwill on the Consolidated Statements of Income for the year ended December 31, 2018. We sold the Aviation business in the third
quarter of 2019.
We review indefinite-lived intangible assets for impairment annually or sooner if events or changes in circumstances indicate that the carrying value may
not be recoverable. We performed a quantitative impairment test in the fourth quarter as of October 31, 2019, using the relief-from-royalty method to value the
Warn trademark, which is our only indefinite-lived intangible; we determined no impairment existed as the trademark had a fair value estimate which exceeded the
carrying value.
Recently Issued Accounting Pronouncements
See "Recent Accounting Pronouncements" in Note 4, "Summary of Significant Accounting Policies" to the consolidated financial statements in Part II,
Item 8 of this Annual Report on Form 10-K for information related to new accounting standards.
Financial Information by Geographic Area
See Note 16, "Segment and Geographic Information" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K 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 have recognized to date and expect to continue to recognize the following:
•
•
•
Restructuring expenses — Non-recurring costs resulting directly from the implementation of the 1 LKQ Europe program from which the business will
derive no ongoing benefit. See Note 6, “Restructuring and Acquisition Related Expenses” to the consolidated financial statements in Part II, Item 8 of this
Annual Report on Form 10-K for further details.
Transformation expenses — Period costs incurred to execute the 1 LKQ Europe program that are expected to contribute to ongoing benefits to the
business (e.g. non-capitalizable implementation costs related to a common ERP system). These expenses are recorded in Selling, general and
administrative expenses.
Transformation capital expenditures — Capitalizable costs for long-lived assets, such as software and facilities, that directly relate to the execution of the
1 LKQ Europe program.
Costs related to the 1 LKQ Europe program incurred to date are reflected in Selling, general and administrative expenses and Purchases of property, plant
and equipment in our consolidated financial statements in Part II, Item 8 of this
37
Annual Report on Form 10-K. We expect that future costs of the program, reflecting all three categories noted above, will range between $100 million and $125
million for the period from 2020 through 2021 with an additional $80 million to $100 million between 2022 and the projected completion date of the project in
2024.
Results of Operations—Consolidated
The following table sets forth statements of income data as a percentage of total revenue for the periods indicated:
Revenue
Cost of goods sold
Gross margin
Selling, general and administrative expenses
Restructuring and acquisition related expenses
Impairment of net assets held for sale and goodwill
Depreciation and amortization
Operating income
Other expense, net
Income from continuing operations before provision for income taxes
Provision for income taxes
Equity in (losses) earnings of unconsolidated subsidiaries
Income from continuing operations
Net income (loss) from discontinued operations
Net income
Less: net income (loss) attributable to continuing noncontrolling interest
Less: net income attributable to discontinued noncontrolling interest
Net income attributable to LKQ stockholders
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
Year Ended December 31,
2019
2018
2017
100.0 %
61.2 %
38.8 %
28.6 %
0.3 %
0.4 %
2.3 %
7.2 %
0.8 %
6.3 %
1.7 %
(0.3)%
4.3 %
0.0 %
4.4 %
0.0 %
0.0 %
4.3 %
100.0 %
61.5 %
38.5 %
28.2 %
0.3 %
0.3 %
2.3 %
7.4 %
1.2 %
6.3 %
1.6 %
(0.5)%
4.1 %
(0.0)%
4.1 %
0.0 %
— %
4.0 %
100.0 %
61.0 %
39.0 %
27.9 %
0.2 %
— %
2.3 %
8.7 %
0.8 %
7.9 %
2.4 %
0.1 %
5.5 %
(0.1)%
5.4 %
(0.0)%
— %
5.5 %
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Revenue. The following table summarizes the changes in revenue by category (in thousands):
Year Ended December 31,
Percentage Change in Revenue
Parts & services revenue
Other revenue
Total revenue
2019
11,877,846 $
2018
11,233,407
628,263
643,267
12,506,109 $
11,876,674
$
$
0.3 %
(3.3)%
0.1 %
Organic
Acquisition
Foreign Exchange
(2.2)%
7.6%
1.2%
7.3%
(0.2)%
(2.1)%
Total Change
5.7 %
(2.3)%
5.3 %
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
The growth in parts and services revenue of 5.7% represented increases in segment revenue of 11.8% in Europe (driven by the Stahlgruber acquisition in
May 2018) and 0.9% in North America and a decrease of 0.9% in Specialty. The decrease in other revenue of 2.3% was primarily driven by a $21 million organic
decrease, largely attributable to our North America segment. Refer to the discussion of our segment results of operations for factors contributing to the change in
revenue by segment during the year ended December 31, 2019 compared to the year ended December 31, 2018.
Cost of Goods Sold. Cost of goods sold decreased to 61.2% of revenue in the year ended December 31, 2019 from 61.5% of revenue in the year ended
December 31, 2018. Our North America segment generated a 0.6% improvement in gross margin, which was partially offset by (i) a 0.2% increase in cost of goods
sold attributable to mix and (ii) an increase of 0.2% primarily due to inventory write-downs in our Europe segment. The mix impact is a result of our Stahlgruber
acquisition, as the lower margin Europe segment makes up a larger percentage of the consolidated results and has a dilutive effect on the gross
38
margin percentage. We recorded a $21 million reduction of inventory primarily due to our Europe segment related to U.K. branch consolidation and brand
rationalization initiated as part of our restructuring program. See Note 6, "Restructuring and Acquisition Related Expenses" to the consolidated financial statements
in Part II, Item 8 of this Annual Report on Form 10-K for further information on our restructuring plans. Refer to the discussion of our segment results of
operations for factors contributing to the changes in cost of goods sold as a percentage of revenue by segment for the year ended December 31, 2019 compared to
the year ended December 31, 2018.
Selling, General and Administrative Expenses. Our selling, general and administrative ("SG&A") expenses as a percentage of revenue increased to 28.6%
in the year ended December 31, 2019 from 28.2% in the year ended December 31, 2018, primarily as a result of 0.3% and 0.2% increases from our North America
and Europe segments, respectively. Refer to the discussion of our segment results of operations for factors contributing to the changes in SG&A expenses as a
percentage of revenue by segment for the year ended December 31, 2019 compared to the year ended December 31, 2018.
Restructuring and Acquisition Related Expenses. The following table summarizes restructuring and acquisition related expenses for the periods indicated
(in thousands):
Restructuring expenses
Acquisition related expenses
Total restructuring and acquisition related expenses
Year Ended December 31,
2019
2018
Change
$
$
34,832 (1)
2,147 (3)
36,979
$
$
14,313 (2)
18,115 (4)
32,428
$
$
20,519
(15,968)
4,551
(1) Restructuring expenses for the year ended December 31, 2019 primarily consisted of (i) $20 million related to our 2019 global restructuring program, and
(ii) $14 million related to integration costs from acquisitions.
(2) Restructuring expenses for the year ended December 31, 2018 primarily consisted of $10 million related to the integration of our acquisition of Andrew
Page and $3 million related to our Specialty segment. These integration activities included the closure of duplicate facilities and termination of
employees.
(3) Acquisition related expenses for the year ended December 31, 2019 included costs related to completed and pending acquisitions.
(4) Acquisition related expenses for the year ended December 31, 2018 primarily consisted of $16 million of costs for our acquisition of Stahlgruber. The
remaining costs related to other completed acquisitions and acquisitions that were pending as of December 31, 2018.
See Note 6, "Restructuring and Acquisition Related Expenses" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form
10-K for further information on our restructuring and integration plans.
Impairment of Net Assets Held for Sale and Goodwill. We recorded a $47 million impairment charge on net assets held for sale for the year ended
December 31, 2019. The impairment charge was primarily attributable to our North America segment. We recorded a $33 million goodwill impairment charge on
the Aviation reporting unit in our North America segment in the fourth quarter of 2018. See "Net Assets Held for Sale" and "Intangible Assets" in Note 4,
"Summary of Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further
information on the impairment charges.
Depreciation and Amortization. The following table summarizes depreciation and amortization for the periods indicated (in thousands):
Depreciation
Amortization
Total depreciation and amortization
Year Ended December 31,
2019
2018
Change
$
$
150,649 $
137,632 $
140,121
136,581
290,770 $
274,213 $
13,017 (1)
3,540 (2)
16,557
(1) Depreciation expense included an incremental $6 million in our Europe segment, principally due to (i) a $7 million increase in depreciation expense from
our acquisition of Stahlgruber, and (ii) several individually immaterial factors that increased depreciation expense by $2 million in the aggregate, partially
offset by (iii) a decrease of $3 million related to the impact of foreign currency translation, primarily due to decreases in the euro and pound sterling
exchange rates during the year ended December 31, 2019 compared to the prior year period. Depreciation expense
39
also included an incremental $6 million in our North America segment, primarily due to capital expenditures related to new warehouse openings and
upgrades to our existing information technology infrastructure.
(2) The increase in amortization expense primarily reflected (i) an incremental $16 million from our acquisition of Stahlgruber, partially offset by (ii) a
decrease of $6 million related to the impact of foreign currency translation, principally due to a decrease in the euro exchange rate during the year ended
December 31, 2019 compared to the prior year period, and (iii) a decrease of $6 million related to our 2016 acquisition of Rhiag, which had lower
amortization expense during the year ended December 31, 2019 compared to the prior year period as a result of accelerated amortization on a customer
relationship intangible asset.
Other Expense, Net. The following table summarizes the components of the change in other expense, net (in thousands):
Other expense, net for the year ended December 31, 2018
$
138,810
Decrease due to:
Interest expense
(Gain) loss on debt extinguishment
Interest income and other income, net
Net decrease
(7,873) (1)
(1,478)
(23,838) (2)
(33,189)
Other expense, net for the year ended December 31, 2019
$
105,621
(1) The decrease in interest expense is primarily related to (i) a $9 million decrease from lower interest rates on borrowings under our senior secured credit
agreement compared to the prior year period, and (ii) a $4 million decrease from foreign currency translation, primarily related to a decrease in the euro
exchange rate during the year ended December 31, 2019 compared to the prior year period, partially offset by (iii) a $5 million increase resulting from
higher outstanding debt during the year ended December 31, 2019 compared to the prior year period (including the borrowings in 2018 under our Euro
Notes (2026/28) for the Stahlgruber acquisition).
(2) The increase in interest income and other income, net primarily consisted of (i) a $12 million non-recurring gain related to resolution of an acquisition
related matter in the fourth quarter of 2019, (ii) a $5 million fair value loss recorded during 2018 related to a preferential rights issue to subscribe for new
shares at a discounted share price for our equity method investment in Mekonomen; see Note 4, "Summary of Significant Accounting Policies" to the
consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information, (iii) $3 million of proceeds received in the
first quarter of 2019 related to an insurance settlement in our North America segment, (iv) a $2 million non-recurring impairment loss recorded during the
second quarter of 2018 related to our Andrew Page operation, and (v) several individually immaterial factors that increased interest and other income by
$2 million in the aggregate.
Provision for Income Taxes. Our effective income tax rate for the year ended December 31, 2019 was 27.2%, compared to 25.7% for the prior year. The
increase was primarily attributable to the impact of a favorable discrete item of $10 million for the year ended December 31, 2018, reflecting an adjustment to the
Tax Act transition tax. We did not have a similar benefit in 2019, thus creating an increase of 1.4% on the annual tax rate. The increase was also partially
attributable to the impact of a favorable discrete item of approximately $5 million for the year ended December 31, 2018, for excess tax benefits from stock-based
payments; there were $3 million of excess tax benefits from stock-based payments for the year ended December 31, 2019 for an unfavorable year over year impact
of 0.3%. See Note 15, "Income Taxes" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.
Equity in (Losses) Earnings of Unconsolidated Subsidiaries. Equity in (losses) earnings of unconsolidated subsidiaries for the year ended December 31,
2019 primarily related to our investment in Mekonomen. During the years ended December 31, 2019 and 2018, we recognized other-than-temporary impairment
charges of $40 million and $71 million, respectively, related to our investment in Mekonomen. See "Investments in Unconsolidated Subsidiaries" in Note 4,
"Summary of Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further
information on the impairment charges. Excluding the impairment charges, we recorded equity in earnings of $9 million and $7 million related to our investment in
Mekonomen for the years ended December 31, 2019 and 2018, respectively.
Foreign Currency Impact. We translate our statements of income at the average exchange rates in effect for the period. Relative to the rates used during
the year ended December 31, 2018, the Czech koruna, euro, pound sterling and Canadian dollar rates used to translate the 2019 statements of income decreased by
5%, 5%, 4% and 2%, respectively. The negative translation effect of the change in foreign currencies against the U.S. dollar combined with the negative impact of
realized and
40
unrealized currency gains and losses for the year ended December 31, 2019 resulted in a $0.03 negative effect on diluted earnings per share relative to the prior
year period.
Net Income (Loss) from Discontinued Operations. We recorded net income of $2 million and a net loss of $4 million from discontinued operations during
the years ended December 31, 2019 and 2018, respectively. See Note 3, "Discontinued Operations" to the consolidated financial statements in Part II, Item 8 of this
Annual Report on Form 10-K for further information.
Net (Loss) Income Attributable to Continuing and Discontinued Noncontrolling Interest. Net (loss) income attributable to continuing noncontrolling
interest for the year ended December 31, 2019 was comparable to the prior year period, due to (i) a $2 million decrease in our North America segment, as we
allocated a loss of $1 million to the noncontrolling interest of an immaterial subsidiary during the year ended December 31, 2019, which was offset by (ii) a $2
million increase related to the noncontrolling interest of subsidiaries acquired in connection with the Stahlgruber acquisition. Net income attributable to
discontinued noncontrolling interest was $1 million for the year ended December 31, 2019 and related to the Stahlgruber Czech Republic wholesale business. See
Note 3, "Discontinued Operations" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on this
business.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenue. The following table summarizes the changes in revenue by category (in thousands):
Year Ended December 31,
Percentage Change in Revenue
Parts & services revenue
Other revenue
Total revenue
2018
11,233,407 $
643,267
2017
9,208,634
528,275
11,876,674 $
9,736,909
$
$
Organic
Acquisition
Foreign Exchange
Total Change
4.4%
20.4%
5.3%
16.0%
1.4%
15.3%
1.5%
0.0%
1.4%
22.0%
21.8%
22.0%
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
The change in parts and services revenue of 22.0% represented increases in segment revenue of 6.5% in North America, 43.4% in Europe and 13.2% in
Specialty. Organic growth in parts and services revenue on a per day basis was 4.1% as there was one additional selling day in 2018 compared to 2017. The
increase in other revenue of 21.8% was primarily driven by a $108 million organic increase, largely attributable to our North America segment. Refer to the
discussion of our segment results of operations for factors contributing to the change in revenue by segment during the year ended December 31, 2018 compared to
the year ended December 31, 2017.
Cost of Goods Sold. Cost of goods sold increased to 61.5% of revenue in the year ended December 31, 2018 from 61.0% of revenue in the year ended
December 31, 2017. Cost of goods sold increased 0.4% and 0.3% as a result of our Europe and North America segments, respectively. Refer to the discussion of
our segment results of operations for factors contributing to the changes in cost of goods sold as a percentage of revenue by segment for the year ended
December 31, 2018 compared to the year ended December 31, 2017.
Selling, General and Administrative Expenses. Our SG&A expenses as a percentage of revenue increased to 28.2% in the year ended December 31, 2018
from 27.9% in the year ended December 31, 2017, primarily as a result of a 0.2% increase from our North America segment. Refer to the discussion of our
segment results of operations for factors contributing to the changes in SG&A expenses as a percentage of revenue by segment for the year ended December 31,
2018 compared to the year ended December 31, 2017.
Restructuring and Acquisition Related Expenses. The following table summarizes restructuring and acquisition related expenses for the periods indicated
(in thousands):
Restructuring expenses
Acquisition related expenses
Total restructuring and acquisition related expenses
Year Ended December 31,
2018
2017
Change
$
$
14,313 (1)
18,115 (3)
32,428
$
$
5,012 (2)
14,660 (4)
19,672
$
$
9,301
3,455
12,756
(1) Restructuring expenses for the year ended December 31, 2018 primarily consisted of $10 million related to the integration of our acquisition of Andrew
Page and $3 million related to our Specialty segment. These integration activities included the closure of duplicate facilities and termination of
employees.
41
(2) Restructuring expenses for the year ended December 31, 2017 included $2 million, $2 million, and $1 million related to the integration of acquired
businesses in our North America, Specialty, and Europe segments, respectively. These integration activities included the closure of duplicate facilities and
termination of employees.
(3) Acquisition related expenses for the year ended December 31, 2018 primarily consisted of $16 million of costs for our acquisition of Stahlgruber. The
remaining costs related to other completed acquisitions and acquisitions that were pending as of December 31, 2018.
(4) Acquisition related expenses for the year ended December 31, 2017 included $5 million of costs for our acquisition of Andrew Page, primarily related to
legal and other professional fees associated with the CMA review. The remaining acquisition related costs for the year ended December 31, 2017
consisted of external costs for completed acquisitions; pending acquisitions as of December 31, 2017, including $4 million related to Stahlgruber; and
potential acquisitions that were terminated.
See Note 6, "Restructuring and Acquisition Related Expenses" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form
10-K for further information on our restructuring and integration plans.
Impairment of Net Assets Held for Sale and Goodwill. We recorded a $33 million goodwill impairment charge on the Aviation reporting unit in the fourth
quarter of 2018. See "Intangible Assets" in Note 4, "Summary of Significant Accounting Policies," for further information.
Depreciation and Amortization. The following table summarizes depreciation and amortization for the periods indicated (in thousands):
Depreciation
Amortization
Total depreciation and amortization
Year Ended December 31,
2018
2017
Change
$
$
137,632 $
117,859 $
136,581
101,687
274,213 $
219,546 $
19,773 (1)
34,894 (2)
54,667
(1) The increase in depreciation expense primarily reflected an increase of $17 million in our Europe segment, composed of (i) $10 million of incremental
depreciation expense from our acquisition of Stahlgruber, (ii) a $3 million increase due to a measurement period adjustment recorded in the year ended
December 31, 2017 related to our valuation procedures for our acquisition of Rhiag that reduced depreciation expense, and (iii) $3 million of incremental
depreciation expense from our acquisitions of aftermarket parts distribution businesses in Belgium and Poland in the third quarter of 2017. Depreciation
expense also increased by $2 million related to the impact of foreign currency translation, primarily due to increases in the pound sterling, euro, and
Czech koruna exchange rates during 2018 compared to the prior year.
(2) The increase in amortization expense primarily reflected (i) an increase of $37 million from our acquisition of Stahlgruber, and (ii) an increase of $4
million from our acquisition of Warn, partially offset by (iii) a $7 million decrease due to our 2016 acquisitions of Rhiag and PGW, which had higher
amortization expense in 2017 compared to 2018 as a result of accelerated amortization on the customer relationship intangible assets.
Other Expense, Net. The following table summarizes the components of the year-over-year increase in other expense, net (in thousands):
Other expense, net for the year ended December 31, 2017
$
78,371
Increase due to:
Interest expense
Loss on debt extinguishment
Gains on bargain purchases
Interest income and other income, net
Net increase
44,737 (1)
894
1,452 (2)
13,356 (3)
60,439
Other expense, net for the year ended December 31, 2018
$
138,810
(1) Additional interest primarily related to (i) a $38 million increase resulting from higher outstanding debt during 2018 compared to the prior year (including
the borrowings under our Euro Notes (2026/28)), (ii) a $5 million increase from higher interest rates on borrowings under our senior secured credit
agreement compared to the prior year, and (iii) a $2
42
million increase from foreign currency translation, primarily related to an increase in the euro exchange rate during the year ended December 31, 2018
compared to the year ended December 31, 2017.
(2) Over the past three years, we have completed several European acquisitions that resulted in gains on bargain purchase. In 2018, newly recorded gains and
adjustments related to preliminary gains decreased relative to the prior year amount.
(3) The increase in interest income and other income, net primarily consisted of (i) a $6 million increase in foreign currency losses, (ii) a $5 million fair value
loss recorded during 2018 related to a preferential rights issue to subscribe for new shares at a discounted share price for our equity method investment in
Mekonomen; see Note 4, "Summary of Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this Annual Report
on Form 10-K for further information, and (iii) a non-recurring $4 million gain recorded in 2017 due to a decrease in the fair value of contingent
consideration liabilities.
Provision for Income Taxes. Our effective income tax rate was 25.7% for the year ended December 31, 2018, compared to 30.7% for the year ended
December 31, 2017. The following table summarizes the components of our provision for income taxes for the periods indicated (in thousands):
Base provision for income taxes
Excess tax benefits from stock-based payments
U.S. tax reform deferred tax rate adjustment
U.S. tax reform transition tax on foreign earnings
Other discrete items
Provision for income taxes
Year Ended December 31,
2018
$
202,511 $
(4,859)
—
(9,581)
3,324
2017
266,403 (1)
(8,000) (2)
(72,988) (3)
50,800 (4)
(655)
$
191,395 $
235,560
(1) Excluding the impact of discrete items, prior to the enactment of the Tax Act our recurring annual effective tax rate was approximately 35%. Largely due
to the reduction in the U.S. federal tax rate to 21%, we estimated the rate to be approximately 27%.
(2) Represents a discrete item for excess tax benefits received upon the exercise of stock options or vesting of RSUs.
(3) The 2017 amount represented the provisional estimate of the revaluation of deferred tax assets and liabilities as a result of the Tax Act which reduced the
U.S. federal corporate tax rate. There were no adjustments to the revaluation recorded in 2018; the accounting for this item is complete.
(4) The 2017 amount represented the provisional estimate of the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings
as of December 31, 2017 as a result of the Tax Act. In 2018, we recognized a $10 million favorable adjustment to the Tax Act transition tax provisional
estimate; the accounting for this item is complete.
For further discussion of the Tax Act, see Note 15, "Income Taxes," included in Part II, Item 8 of this Annual Report on Form 10-K.
Equity in (Losses) Earnings of Unconsolidated Subsidiaries. Equity in (losses) earnings of unconsolidated subsidiaries for the years ended December 31,
2018 and 2017 primarily related to our investment in Mekonomen. During the year ended December 31, 2018, we recorded $71 million in other-than-temporary
impairments related to our investment in Mekonomen. See Note 4, "Summary of Significant Accounting Policies" to the consolidated financial statements in Part
II, Item 8 of this Annual Report on Form 10-K for further information on the impairment charges. The impairment charges are excluded from our calculation of
Segment EBITDA. See Note 16, "Segment and Geographic Information" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form
10-K for our reconciliation of Net Income to Segment EBITDA. Excluding the impairment charges, we recorded equity in earnings of $7 million during each of
the years ended December 31, 2018 and 2017 related to our investment in Mekonomen.
Foreign Currency Impact. We translate our statements of income at the average exchange rates in effect for the period. Relative to the rates used during
the year ended December 31, 2017, the Czech koruna, euro, and pound sterling rates used to translate the 2018 statements of income increased by 7%, 5%, and 4%,
respectively. The translation effect of the change in foreign currencies against the U.S. dollar and realized and unrealized currency losses for the year ended
December 31, 2018 resulted in a $0.02 positive effect on diluted earnings per share from continuing operations relative to the prior year.
43
Net Income (Loss) from Discontinued Operations. We recorded net losses from discontinued operations of $4 million and $7 million during the years
ended December 31, 2018 and 2017, respectively. Discontinued operations represents the automotive glass manufacturing business of PGW, which we sold on
March 1, 2017. See Note 3, "Discontinued Operations" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further
information.
Net (Loss) Income Attributable to Continuing and Discontinued Noncontrolling Interest. Net (loss) income attributable to continuing noncontrolling
interest for the year ended December 31, 2018 increased $7 million from 2017 due to (i) a $5 million increase in our North America segment, as we allocated a loss
of $4 million to the noncontrolling interest of an immaterial subsidiary during the year ended December 31, 2017, and (ii) a $2 million increase related to the
noncontrolling interest of subsidiaries acquired in connection with the Stahlgruber acquisition.
Results of Operations—Segment Reporting
We have four operating segments: Wholesale – North America, Europe, Specialty and Self Service. Our Wholesale – North America and Self Service
operating segments are aggregated into one reportable segment, North America, because they possess similar economic characteristics and have common products
and services, customers, and methods of distribution. Therefore, we present three reportable segments: North America, Europe and Specialty.
We have presented the growth of our revenue and profitability in our operations on both an as reported and a constant currency basis. The constant
currency presentation, which is a non-GAAP measure, excludes the impact of fluctuations in foreign currency exchange rates. We believe providing constant
currency information provides valuable supplemental information regarding our growth and profitability, consistent with how we evaluate our performance, as this
statistic removes the translation impact of exchange rate fluctuations, which are outside of our control and do not reflect our operational performance. Constant
currency revenue and Segment EBITDA results are calculated by translating prior year revenue and Segment EBITDA in local currency using the current year's
currency conversion rate. This non-GAAP financial measure has important limitations as an analytical tool and should not be considered in isolation or as a
substitute for an analysis of our results as reported under GAAP. Our use of this term may vary from the use of similarly-titled measures by other issuers due to
potential inconsistencies in the method of calculation and differences due to items subject to interpretation. In addition, not all companies that report revenue or
profitability on a constant currency basis calculate such measures in the same manner as we do, and accordingly, our calculations are not necessarily comparable to
similarly-named measures of other companies and may not be appropriate measures for performance relative to other companies.
The following table presents our financial performance, including third party revenue, total revenue and Segment EBITDA, by reportable segment for the
periods indicated (in thousands):
Third Party Revenue
North America
Europe
Specialty
Total third party revenue
Total Revenue
North America
Europe
Specialty
Eliminations
Total revenue
Segment EBITDA
North America
Europe
Specialty
$
$
$
$
$
2019
% of Total
Segment
Revenue
2018
% of Total
Segment
Revenue
2017
% of Total
Segment
Revenue
Year Ended December 31,
5,208,589
5,838,124
1,459,396
12,506,109
5,209,294
5,838,124
1,464,042
(5,351)
$
5,181,964
$
4,798,901
5,221,754
1,472,956
3,636,811
1,301,197
$
11,876,674
$
9,736,909
$
5,182,609
$
4,799,651
5,221,754
1,477,680
(5,369)
3,636,811
1,305,516
(5,069)
12,506,109
$
11,876,674
$
9,736,909
712,957
454,220
161,184
13.7% $
7.8%
11.0%
660,153
422,721
168,525
12.7% $
8.1%
11.4%
655,275
319,156
142,159
13.7%
8.8%
10.9%
The key measure of segment profit or loss reviewed by our chief operating decision maker, who is our Chief Executive Officer, is Segment EBITDA.
Segment EBITDA includes revenue and expenses that are controllable by the segment. Corporate
44
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 acquisition 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, and impairment charges. EBITDA, which is the basis for Segment
EBITDA, is calculated as net income, less net income (loss) attributable to continuing and discontinued noncontrolling interest, excluding discontinued operations
and discontinued noncontrolling interest, depreciation, amortization, interest (which includes gains and losses on debt extinguishment) and income tax expense.
See Note 16, "Segment and Geographic Information" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for a
reconciliation of total Segment EBITDA to net income.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
North America
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our North America segment (in thousands):
Year Ended December 31,
Percentage Change in Revenue
North America
Parts & services revenue
2019
4,600,903 $
2018
4,558,220
$
Other revenue
607,686
623,744
0.9 % (1 )
(3.4)% (2 )
Total third party revenue
5,208,589 $
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
5,181,964
0.4 %
$
Organic
Acquisition (3)
Foreign Exchange
Total Change
0.2%
0.8%
0.3%
(0.2)%
(0.0)%
(0.2)%
0.9 %
(2.6)%
0.5 %
(1) Parts and services organic revenue increased 0.9% for the year ended December 31, 2019 compared to the prior year period. This relatively low growth
rate was impacted by (i) lower revenue in our glass and aviation businesses, which had unfavorable effects on organic growth of 0.4% and 0.2%,
respectively, and (ii) collision and liability related auto claims being 1.4% lower for the year ended December 31, 2019 compared to the prior year period,
which adversely impacted volume in our wholesale operations. Additionally, our North America segment generated a 5.7% organic growth rate for parts
and services revenue in the year ended December 31, 2018, due in part to severe winter weather conditions. Facing a strong comparable period and with
less favorable weather conditions in 2019, organic parts and services revenue growth was below our historical average.
(2) The $21 million year over year organic decrease in other revenue primarily related to (i) a $67 million decrease in revenue from scrap steel and other
metals primarily related to lower prices, partially offset by increased volumes, and (ii) a $12 million decrease in core revenue primarily related to
decreased volumes, partially offset by (iii) a $62 million increase in revenue from precious metals (platinum, palladium and rhodium) primarily due to
higher prices.
(3) Acquisition related growth in 2019 reflected revenue from our acquisitions of seven wholesale businesses and one self service business from the
beginning of 2018 through the one-year anniversary of the acquisitions, partially offset by the disposal of our aviation business in the third quarter of
2019.
Segment EBITDA. Segment EBITDA increased $53 million, or 8.0%, for the year ended December 31, 2019 compared to the prior year period. Sequential
decreases in scrap steel prices in our salvage and self service operations had an unfavorable impact of $23 million on North America Segment EBITDA for the
year ended December 31, 2019, compared to a $5 million favorable impact for the year ended December 31, 2018. This unfavorable impact resulted from the
decrease in scrap steel prices between the date we purchased a vehicle, which influences the price we pay for a vehicle, and the date we scrapped a vehicle, which
influences the price we receive for scrapping a vehicle. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our North
America segment:
45
North America
Segment EBITDA for the year ended December 31, 2018
Increase (decrease) due to:
Change in gross margin
Change in segment operating expenses
Change in other expense, net and net income attributable to continuing noncontrolling interest
Segment EBITDA for the year ended December 31, 2019
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
Percentage of Total
Segment Revenue
12.7 %
1.3 % (1)
(0.6)% (2)
0.2 % (3)
13.7 %
(1) The increase in gross margin primarily reflected favorable impacts of 1.3% from our wholesale operations and 0.3% from the disposal of our aviation
business in the third quarter of 2019, partially offset by several individually immaterial factors that had an unfavorable impact of 0.3% in the aggregate.
The increase in wholesale gross margin was primarily attributable to ongoing margin improvement initiatives and, to a lesser extent, the favorable impact
from higher prices of precious metals (platinum, palladium and rhodium) compared to the prior year period.
(2) The increase in segment operating expenses as a percentage of revenue is primarily related to a 0.4% increase in facility expenses principally due to
higher expenses in rent related to expansions and renewals.
(3) The decrease in other expense, net and net income attributable to continuing noncontrolling interest was due to several individually immaterial factors that
had a favorable impact of 0.2% in the aggregate.
Europe
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our Europe segment (in thousands):
Year Ended December 31,
Percentage Change in Revenue
Europe
Parts & services revenue
2019
5,817,547 $
$
Other revenue
20,577
2018
5,202,231
19,523
0.1 %
(1.7)%
Organic (1)
Acquisition (2)
Total third party revenue
5,838,124 $
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
5,221,754
0.1 %
$
Foreign Exchange (3)
(4.6)%
16.3%
12.8%
16.3%
(5.8)%
(4.6)%
Total Change
11.8%
5.4%
11.8%
(1) Parts and services organic revenue increased for the year ended December 31, 2019, mainly driven by our Eastern European and U.K. operations, which
had low single-digit growth rates. Softer economic conditions across the continent continued to have a negative impact on revenue growth, most notably
in Germany and Italy.
(2) Acquisition related growth for the year ended December 31, 2019 was $850 million, or 16.3%, primarily from our acquisition of Stahlgruber.
(3) Compared to the prior year, exchange rates decreased our revenue growth by $240 million, or 4.6%, primarily due to the stronger U.S. dollar against the
euro, pound sterling and Czech koruna for the year ended December 31, 2019 compared to the prior year period.
Segment EBITDA. Segment EBITDA increased $31 million, or 7.5%, for the year ended December 31, 2019 compared to the prior year period. Our
Europe Segment EBITDA included a negative year over year impact of $21 million related to the translation of local currency results into U.S. dollars at lower
exchange rates than those experienced during the year ended December 31, 2018. On a constant currency basis (i.e. excluding the translation impact), Segment
EBITDA increased by $53 million, or 12.4%, compared to the prior year. Refer to the Foreign Currency Impact discussion within the Results of Operations–
Consolidated section above for further detail regarding foreign currency impact on our results for the year ended December 31, 2019. The following table
summarizes the changes in Segment EBITDA as a percentage of revenue in our Europe segment:
46
Europe
Segment EBITDA for the year ended December 31, 2018
Increase (decrease) due to:
Change in gross margin
Change in segment operating expenses
Segment EBITDA for the year ended December 31, 2019
Percentage of Total
Segment Revenue
8.1 %
0.2 % (1)
(0.5)% (2)
7.8 %
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
(1) Gross margin increased primarily due to (i) a 0.4% favorable impact related to an increase in supplier rebates as a result of centralized procurement for
our Europe segment and (ii) a 0.3% increase in our U.K. operations primarily as a result of decreased costs related to the national distribution facility,
primarily due to expenses related to temporary service issues in 2018 that did not reoccur in 2019, as well as decreased inventory reserves, partially offset
by (iii) a 0.3% unfavorable impact related to our Benelux and Italy operations, principally due to higher inventory write-offs and lower prices, and (iv)
several individually immaterial factors that had an unfavorable impact of 0.2% in the aggregate.
(2) The increase in segment operating expenses was primarily due to (i) a 0.4% increase in personnel expenses principally as a result of the negative leverage
effect and wage inflation due to low unemployment partially offset by a decrease from other personnel-related costs, including salaries and wages and
non-incentive benefits, primarily due to reduced headcount, and (ii) a 0.2% increase in transformation expenses related to the 1 LKQ Europe program.
Specialty
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our Specialty segment (in thousands):
Year Ended December 31,
Percentage Change in Revenue
Specialty
Parts & services revenue
2019
1,459,396 $
2018
1,472,956
$
Other revenue
—
—
(0.7)%
— %
Organic (1)
Acquisition
Total third party revenue
1,459,396 $
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
1,472,956
(0.7)%
$
Foreign Exchange
(0.3)%
—%
—%
—%
— %
(0.3)%
Total Change
(0.9)%
— %
(0.9)%
(1) The organic decline in parts and services revenue was driven by lower year over year wholesale drop ship sales largely due to supplier policy changes
restricting our ability to sell to certain online retailers; as well as decreased sales volumes in our Canada operations compared to the prior year period,
primarily due to softening economic conditions. This organic decline was partially offset by modest growth in both our automotive and RV businesses in
the U.S., largely due to expansion of our product line coverage, strong exclusive line performance, and continued roll-out of new product applications for
new model year vehicles.
Segment EBITDA. Segment EBITDA decreased $7 million, or 4.4%, for the year ended December 31, 2019 compared to the prior year period. The
following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Specialty segment:
47
Specialty
Segment EBITDA for the year ended December 31, 2018
(Decrease) increase due to:
Change in gross margin
Change in segment operating expenses
Change in other expense, net
Segment EBITDA for the year ended December 31, 2019
Percentage of Total
Segment Revenue
11.4 %
(1.2)% (1)
0.6 % (2)
0.1 %
11.0 %
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
(1) The decrease in gross margin reflects unfavorable impacts of (i) 0.4% of higher product costs, primarily due to non-recurring benefits from supplier
discounts resulting from strategic purchasing efforts in the fourth quarter of 2017, which had a favorable impact on the year ended December 31, 2018 as
they were recognized over a turn of inventory, (ii) 0.4% due to unfavorable product mix in 2019, and (iii) several individually immaterial factors that had
an unfavorable impact of 0.4% in the aggregate.
(2) The decrease in segment operating expenses reflects favorable impacts of (i) 0.5% in personnel costs primarily due to reduced headcount and (ii) 0.3% in
freight expenses due to a decreased use of third party freight, partially offset by (iii) several individually immaterial factors that had an unfavorable
impact of 0.2% in the aggregate.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
North America
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our North America segment (in thousands):
Year Ended December 31,
Percentage Change in Revenue
North America
Parts & services revenue
Other revenue
Total third party revenue
$
$
2018
4,558,220 $
623,744
2017
4,278,531
520,370
5.7% (1 )
19.6% (2 )
5,181,964 $
4,798,901
7.2%
0.8%
0.3%
0.8%
0.0%
0.0%
0.0%
6.5%
19.9%
8.0%
Organic
Acquisition (3)
Foreign Exchange
Total Change
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
(1) Organic growth in parts and services revenue was attributable to roughly equal impacts of favorable pricing and increased sales volumes in our wholesale
operations. The volume increases were primarily driven by (i) incremental sales related to an agreement signed in December 2017 for the distribution of
batteries, and (ii) to a lesser extent, severe winter weather conditions in the first quarter of 2018 compared to mild winter weather conditions in the prior
year period. Organic growth in parts and services revenue for our North America segment on a per day basis was 5.3% as there was one additional selling
day in 2018 compared to 2017.
(2) The $103 million increase in other revenue primarily related to (i) a $64 million increase in revenue from scrap steel and other metals primarily related to
higher prices and, to a lesser extent, increased volumes, year over year, (ii) a $24 million increase in revenue from metals found in catalytic converters
(platinum, palladium, and rhodium) primarily due to higher prices and, to a lesser extent, increased volumes, year over year, and (iii) a $7 million increase
in core revenue primarily related to increased volumes year over year.
(3) Acquisition related growth in 2018 reflected revenue from our acquisition of ten wholesale businesses from the beginning of 2017 up to the one-year
anniversary of the acquisition dates.
Segment EBITDA. Segment EBITDA increased $5 million, or 0.7%, in 2018 compared to the prior year. Sequential increases in scrap steel prices in our
salvage and self service operations had a favorable impact of $5 million on North America Segment EBITDA during the year ended December 31, 2018, compared
to a $12 million positive impact on the year ended December 31, 2017. This favorable impact resulted from the increase in scrap steel prices between the date we
purchased a vehicle, which influences the price we pay for a vehicle, and the date we scrapped a vehicle, which influences the price we receive for scrapping a
vehicle. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our North America segment:
48
North America
Segment EBITDA for the year ended December 31, 2017
Decrease due to:
Change in gross margin
Change in segment operating expenses
Change in other expense, net and net income (loss) attributable to noncontrolling interest
Segment EBITDA for the year ended December 31, 2018
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
Percentage of Total
Segment Revenue
13.7 %
(0.5)% (1)
(0.3)% (2)
(0.2)% (3)
12.7 %
(1) The decrease in gross margin reflected unfavorable impacts of 0.3% and 0.2% from our wholesale and self service operations, respectively. The decrease
in wholesale gross margin is primarily attributable to (i) a shift in our sales toward lower margin products, including batteries, compared to the prior year
period, and (ii) higher car costs in our salvage operations. The decrease in self service gross margin is primarily attributable to higher car costs as a result
of increases in scrap prices in the first half of the year. While higher car costs can produce more gross margin dollars, these cars tend to have a dilutive
effect on the gross margin percentage as parts revenue will typically increase at a lesser rate than the rise in average car cost. Self service gross margin
was negatively impacted in the second half of 2018 due to declining scrap steel prices as the higher cost vehicles were scrapped.
(2) The increase in segment operating expenses as a percentage of revenue primarily reflected (i) a 0.3% increase in vehicle expenses primarily due to
increased vehicle rental leases to handle incremental volumes as well as increases in fuel prices, and (ii) a 0.2% increase in freight expenses due to a
higher use of, and increased prices of, third party freight, partially offset by (iii) several individually immaterial factors that had a favorable impact of
0.1% in the aggregate.
(3) The increase in other expense, net and net income (loss) attributable to noncontrolling interest was primarily due to several individually immaterial factors
that had an unfavorable impact of 0.2% in the aggregate.
Europe
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our Europe segment (in thousands):
Year Ended December 31,
Percentage Change in Revenue
Europe
Parts & services revenue
2018
5,202,231 $
2017
3,628,906
$
Other revenue
19,523
7,905
2.9%
74.2%
Organic (1)
Acquisition (2)
Total third party revenue
5,221,754 $
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
3,636,811
3.1%
$
Foreign Exchange (3)
3.8 %
36.7%
72.8%
36.7%
(0.0)%
3.8 %
Total Change
43.4%
147.0%
43.6%
(1) Parts and services revenue growth for the year varied by geography. In our Eastern European operations, revenue grew in the high single digits due to
both existing and new branches (we added 68 since the beginning of 2017). Our Western European operations experienced slight declines to mid-single
digit growth for the year due primarily to higher volumes in the second quarter of 2018 (partly attributable to the timing of the Easter holiday) offsetting
softness in the remainder of the year. While we expect to achieve lower organic growth rates in these more mature markets than in Eastern Europe, our
revenue growth in 2018 was negatively impacted by competitor actions, economic conditions in certain countries, such as Italy, and warmer than normal
weather conditions. Organic growth in parts and services revenue for our Europe segment on a per day basis was 2.6% as there was one additional selling
day in 2018 compared to 2017.
(2) Acquisition related growth for the year ended December 31, 2018 included $1.1 billion, or 30.2%, $79 million, or 2.2%, and $72 million, or 2.0%, from
our acquisitions of Stahlgruber and aftermarket parts distribution businesses in Poland and Belgium, respectively. The remainder of our acquired revenue
growth included revenue from our
49
acquisitions of 20 wholesale businesses in our Europe segment since the beginning of 2017 through the one-year anniversary of the acquisitions.
(3) Compared to the prior year, exchange rates increased our revenue growth by $137 million, or 3.8%, primarily due to the weaker U.S. dollar against the
pound sterling, euro and Czech koruna during 2018 relative to 2017.
Segment EBITDA. Segment EBITDA increased $104 million, or 32.4%, in 2018 compared to the prior year. Our Europe Segment EBITDA included a
positive year over year impact of $15 million related to the translation of local currency results into U.S. dollars at higher exchange rates than those experienced
during 2017. On a constant currency basis (i.e. excluding the translation impact), Segment EBITDA increased by $89 million, or 27.9%, compared to the prior
year. Refer to the Foreign Currency Impact discussion within the Results of Operations - Consolidated section above for further detail regarding foreign currency
impact on our results for the year ended December 31, 2018. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our
Europe segment:
Europe
Segment EBITDA for the year ended December 31, 2017
Decrease due to:
Change in gross margin
Change in segment operating expenses
Change in other expense, net and net income (loss) attributable to noncontrolling interest
Segment EBITDA for the year ended December 31, 2018
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
Percentage of Total
Segment Revenue
8.8 %
(0.2)% (1)
(0.4)% (2)
(0.1)%
8.1 %
(1) The decline in gross margin was due to (i) a 0.6% decrease related to our U.K. operations primarily as a result of incremental costs related to the national
distribution facility, principally due to replenishment issues and related stock availability in the first quarter at our national distribution center and
branches that led to some temporary service issues and increased labor costs to manually stock and receive product, and higher customer incentives,
partially offset by increased supplier rebates, and (ii) a 0.3% net decrease due to mix related to our acquisition of an aftermarket parts distribution
business in Poland during the third quarter of 2017. The unfavorable effects were partially offset by (i) a 0.4% increase in gross margin in our Benelux
operations primarily due to increased supplier rebates and the ongoing move from a three-step to a two-step distribution model, and (ii) a 0.3% favorable
impact related to an increase in supplier rebates as a result of centralized procurement for our Europe segment.
(2) The increase in segment operating expenses as a percentage of revenue was primarily due to a 0.4% increase in personnel expenses principally as a result
of (i) negative leverage effect, as personnel costs grew at a greater rate than organic revenue, and (ii) increased headcount in our Eastern European
operations as new branches were opened, as well as wage inflation due to low unemployment in the region. Additionally, a 0.2% increase in professional
fees, primarily due to new information technology projects and other system enhancements, added to the unfavorable change in segment operating
expenses. The unfavorable effects were partially offset by a 0.2% decrease in freight expenses due to a decreased use of third party freight in our U.K.
operations.
Specialty
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our Specialty segment (in thousands):
50
Year Ended December 31,
Percentage Change in Revenue
Organic (1)
Acquisition (2)
Foreign Exchange
Total Change
Specialty
Parts & services revenue
2018
1,472,956 $
2017
1,301,197
$
Other revenue
—
—
4.6%
—%
Total third party revenue
1,472,956 $
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
1,301,197
4.6%
$
8.6%
—%
8.6%
0.0%
—%
0.0%
13.2%
—%
13.2%
(1) Organic growth in parts and services revenue was primarily due to higher volumes across both our automotive and RV businesses, largely due to
expansion of our product line coverage, strong exclusive line performance, and year over year growth of new vehicle sales of pickups, sport utility
vehicles and other highly accessorized vehicles. Organic growth in parts and services revenue for our Specialty segment on a per day basis was 4.2% as
there was one additional selling day in 2018 compared to 2017.
(2) Acquisition related growth in 2018 included $110 million, or 8.4%, from our acquisition of Warn through the one-year anniversary of the acquisition date.
The remainder of our acquired revenue growth reflected an immaterial amount of acquired revenue from our acquisitions of three wholesale businesses
from the beginning of 2017 up to the one-year anniversary of the acquisition dates.
Segment EBITDA. Segment EBITDA increased $26 million, or 18.5%, in 2018 compared to the prior year. The following table summarizes the changes in
Segment EBITDA as a percentage of revenue in our Specialty segment:
Specialty
Segment EBITDA for the year ended December 31, 2017
Increase (decrease) due to:
Change in gross margin
Change in segment operating expenses
Change in other expense, net
Segment EBITDA for the year ended December 31, 2018
Percentage of Total
Segment Revenue
10.9 %
1.3 % (1)
(0.6)% (2)
(0.2)% (3)
11.4 %
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
(1) The increase in gross margin reflected favorable impacts of (i) 0.8% from our acquisition of Warn, which has a higher gross margin than our other
Specialty operations, and (ii) 0.6% from our initiatives to improve gross margin. The favorable effects were partially offset by 0.2% of increased
inventory write-downs as damaged and defective product was identified during our warehouse expansion projects on the West Coast and in the
Southeastern U.S.
(2) The increase in segment operating expenses reflected unfavorable impacts of (i) 0.3% in personnel costs primarily due to wage inflation, increased
distribution expenses driven by a decreased use of third party freight and increased delivery routes to improve service levels, as well as higher employee
benefit costs, (ii) 0.2% in vehicle and fuel expenses primarily due to increased fuel prices, and (iii) by several individually immaterial factors that had an
unfavorable impact of 0.1% in the aggregate.
(3) The increase in other expense, net is due to several individually immaterial factors that had an unfavorable impact of 0.2% in the aggregate.
51
Liquidity and Capital Resources
The following table summarizes liquidity data as of the dates indicated (in thousands):
Cash and cash equivalents
Total debt (1)
Current maturities (2)
Capacity under credit facilities (3)
Availability under credit facilities (3)
Total liquidity (cash and cash equivalents plus availability under credit facilities)
December 31, 2019
$
523,020 $
December 31,
2018
331,761
4,072,026
4,347,697
326,648
3,260,000
1,922,671
2,445,691
122,117
3,260,000
1,697,698
2,029,459
(1) Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of $30 million and $37 million as of December 31, 2019 and
December 31, 2018, respectively).
(2) Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of immaterial amounts as of both December 31, 2019 and December 31,
2018).
(3) Capacity under credit facilities includes our revolving credit facilities and our receivables securitization facility. Availability under credit facilities is
reduced by our outstanding letters of credit.
We assess our liquidity in terms of our ability to fund our operations and provide for expansion through both internal development and acquisitions. Our
primary sources of liquidity are cash flows from operations and our credit facilities. We utilize our cash flows from operations to fund working capital and capital
expenditures, with the excess amounts going towards funding acquisitions, paying down outstanding debt or repurchasing LKQ stock. As we have pursued
acquisitions as part of our growth strategy, our cash flows from operations have not always been sufficient to cover our investing activities. To fund our
acquisitions, we have accessed various forms of debt financing, including revolving credit facilities, senior notes and our receivables securitization facility.
As of December 31, 2019, we had debt outstanding and additional available sources of financing as follows:
• Senior secured credit facilities maturing in January 2024, composed of term loans totaling $350 million ($341 million outstanding at December 31,
2019) and $3.15 billion in revolving credit ($1.3 billion outstanding at December 31, 2019), bearing interest at variable rates (although a portion of
the outstanding debt is hedged through interest rate swap contracts), with availability reduced by $69 million of amounts outstanding under letters of
credit
• U.S. Notes (2023) totaling $600 million, maturing in May 2023 and bearing interest at a 4.75% fixed rate (redeemed in full on January 10, 2020)
• Euro Notes (2024) totaling $561 million (€500 million), maturing in April 2024 and bearing interest at a 3.875% fixed rate
• Euro Notes (2026/28) totaling $1.1 billion (€1.0 billion), consisting of (i) €750 million maturing in April 2026 and bearing interest at a 3.625%
fixed rate, and (ii) €250 million maturing in April 2028 and bearing interest at a 4.125% fixed rate
• Receivables securitization facility with availability up to $110 million (no outstanding balance as of December 31, 2019), maturing in November
2021 and bearing interest at variable commercial paper rates
From time to time, we may undertake financing transactions to increase our available liquidity, such as (i) our November 2018 amendment to our senior
secured credit facility and (ii) the issuance of the Euro Notes (2026/28) in April 2018 related to the Stahlgruber acquisition. Given the long-term nature of our
investment in Stahlgruber, combined with favorable interest rates, we decided to fund the acquisition primarily through long-term, fixed rate notes. We believe this
approach provides financial flexibility to execute our long-term growth strategy while maintaining availability under our revolver. If we see an attractive
acquisition opportunity, we have the ability to use our revolver to move quickly and have certainty of funding up to the amount of our then-available liquidity. In
December 2019, we announced our intention to redeem our U.S. Notes (2023) to eliminate higher cost debt with lower interest rate borrowings on our credit
facilities and cash on hand. We completed the redemption in January 2020.
52
As of December 31, 2019, we had approximately $1.9 billion available under our credit facilities. Combined with approximately $523 million of cash and
cash equivalents at December 31, 2019, we had approximately $2.4 billion in available liquidity, an increase of $416 million over our available liquidity as of
December 31, 2018.
We believe that our current liquidity and cash expected to be generated by operating activities in future periods will be sufficient to meet our current
operating and capital requirements, although such sources may not be sufficient for future acquisitions depending on their size. While we believe that we have
adequate capacity, from time to time we may need to raise additional funds through public or private financing, strategic relationships or other arrangements. There
can be no assurance that additional funding, or refinancing of our credit facilities, if needed, will be available on terms attractive to us, or at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants or higher interest costs. Our failure
to raise capital if and when needed could have a material adverse impact on our business, operating results, and financial condition.
Beginning in 2019, a number of our European suppliers began participating in supply chain financing programs in select countries under which they may
sell their accounts receivable to the participating financial institutions, allowing us to extend payment terms. We expect more suppliers will begin participating in
supply chain financing programs in 2020. Financial institutions participate in the supply chain financing program on an uncommitted basis and can cease
purchasing receivables from our suppliers at any time. These programs are at the sole discretion of both the supplier and the financial institution on terms that are
negotiated between them. If the financial institutions did not continue to purchase receivables from our suppliers under these programs, the participating vendors
may have a need to renegotiate their payment terms with us, which in turn could cause our borrowings under our revolving credit facility to increase.
Borrowings under the credit agreement accrue interest at variable rates which are tied to the LIBOR or the Canadian Dollar Offered Rate ("CDOR"),
depending on the currency and the duration of the borrowing, plus an applicable margin rate that is subject to change quarterly based on our reported leverage ratio.
We hold interest rate swaps to hedge the variable rates on a portion of our credit agreement borrowings, with the effect of fixing the interest rates on the respective
notional amounts. In addition, we hold currency swaps that contain an interest rate swap component and a foreign currency forward contract component that, when
combined with related intercompany financing arrangements, effectively convert variable rate U.S. dollar-denominated borrowings into fixed rate euro-
denominated borrowings. These derivative transactions are described in Note 11, "Derivative Instruments and Hedging Activities" to the consolidated financial
statements in Part II, Item 8 of this Annual Report on Form 10-K. After giving effect to these contracts, the weighted average interest rate on borrowings
outstanding under our credit agreement at December 31, 2019 was 1.6%. Including our senior notes, our overall weighted average interest rate on borrowings was
3.0% at December 31, 2019.
After 2021, it is unclear whether banks will continue to provide LIBOR submissions to the administrator of LIBOR, and no consensus currently exists as
to what benchmark rate or rates may become accepted alternatives to LIBOR. We cannot currently predict the effect of the discontinuation of, or other changes to,
LIBOR or any establishment of alternative reference rates in the United States, the European Union or elsewhere on the global capital markets. The uncertainty
regarding the future of LIBOR, as well as the transition from LIBOR to any alternative reference rate or rates, could have adverse impacts on our variable rate
obligations that currently use LIBOR as a benchmark rate. We are in the process of evaluating our financing obligations and other contracts that refer to LIBOR.
Outstanding debt under our Credit Agreement, which constitutes the most significant of our LIBOR-based debt obligations, contains provisions that address the
potential discontinuation of LIBOR and facilitate the adoption of an alternate rate of interest. We do not believe that the discontinuation of LIBOR, or its
replacement with an alternative reference rate or rates, will have a material impact on our results of operations, financial position or liquidity.
Cash interest payments were $143 million for the year ended December 31, 2019, including $92 million in semi-annual interest payments on our U.S.
Notes (2023), Euro Notes (2024) and Euro Notes (2026/2028). Interest payments on our Euro Notes (2024) and Euro Notes (2026/2028) are made in April and
October.
We had outstanding credit agreement borrowings of $1.6 billion and $1.7 billion at December 31, 2019 and December 31, 2018, respectively. Of these
amounts, $18 million and $9 million was classified as current maturities at December 31, 2019 and 2018, respectively.
53
The scheduled maturities of long-term obligations outstanding at December 31, 2019 are as follows (in thousands):
Years ending December 31:
2020 (1)
2021 (1)
2022
2023
2024 (1)
Thereafter
Total debt (2)
$
$
326,648
133,951
25,912
21,650
2,427,714
1,136,151
4,072,026
(1) Of the $600 million U.S. Notes (2023) that were redeemed in January 2020, in the table above $185 million is included in 2020 (reflecting the amount
repaid with cash on hand), $105 million is included in 2021 (reflecting the amount repaid using borrowings under the receivables securitization facility),
and $310 million is included in 2024 (reflecting the amount repaid using borrowings under the revolving credit facility).
(2) The total debt amounts presented above reflect the gross values to be repaid (excluding debt issuance costs of $30 million as of December 31, 2019).
Our credit agreement contains customary covenants that impose 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. We were in
compliance with all restrictive covenants under our credit agreement as of December 31, 2019.
The following summarizes our required debt covenants and our actual ratios with respect to those covenants as calculated per the credit agreement as
of December 31, 2019:
Maximum net leverage ratio
Minimum interest coverage ratio
Covenant Level
4.25:1.00
3.00:1.00
Ratio Achieved as of
December 31, 2019
2.6
10.4
The terms net leverage ratio and minimum interest coverage ratio used in the credit agreement are specifically calculated per the credit agreement and
differ in specified ways from comparable GAAP or common usage terms.
As of December 31, 2019, the Company had cash and cash equivalents of $523 million, of which $234 million was held by foreign subsidiaries. In
general, it is our practice and intention to permanently reinvest the undistributed earnings of our foreign subsidiaries, and that position has not changed following
the enactment of the Tax Act and the related imposition of the transition tax. Distributions of dividends from our foreign subsidiaries, if any, would be generally
exempt from further U.S. taxation, either as a result of the new 100% participation exemption under the Tax Act, or due to the previous taxation of foreign earnings
under the transition tax and the GILTI regime. We believe that we have sufficient cash flow and liquidity to meet our financial obligations in the U.S. without
repatriating our foreign earnings. We may, from time to time, choose to selectively repatriate foreign earnings if doing so supports our financing or liquidity
objectives.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The procurement of inventory is the largest operating use of our funds. We normally pay for aftermarket product purchases on standard payment terms or
at the time of shipment, depending on the manufacturer and the negotiated payment terms. We normally pay for salvage vehicles acquired at salvage auctions and
under direct procurement arrangements at the time that we take possession of the vehicles.
The following table sets forth a summary of our aftermarket and manufactured inventory procurement for the years ended December 31, 2019 and 2018
(in thousands):
54
North America
Europe
Specialty
Total
Year Ended December 31,
2019
2018
Change
$
1,372,600 $
1,393,700 $
3,966,000
1,107,200
3,635,400
1,087,600
$
6,445,800 $
6,116,700 $
(21,100) (1)
330,600 (2)
19,600 (3)
329,100
(1)
(2)
In North America, aftermarket purchases during the year ended December 31, 2019 decreased compared to the prior year period primarily as a result of an
increased focus on inventory reduction.
In our Europe segment, the increase in purchases during the year ended December 31, 2019 was primarily driven by (i) a $588 million increase
attributable to incremental inventory purchases as a result of our acquisition of Stahlgruber in the second quarter of 2018, partially offset by (ii) a $79
million decrease attributable to our U.K. operations primarily due to inventory reduction efforts. There was also a decrease of $168 million in inventory
purchases attributable to the decrease in the value of the euro and pound sterling in the year ended December 31, 2019 compared to the prior year period.
(3) Specialty inventory purchases increased $20 million during the year ended December 31, 2019 compared to the prior year period primarily as a result of
targeted purchases to increase annual supplier rebate achievement and build stock to support our 2020 initiatives.
The following table sets forth a summary of our global wholesale salvage and self service procurement of vehicles for the years ended December 31, 2019
and 2018 (in thousands):
North America wholesale salvage cars and trucks
Europe wholesale salvage cars and trucks
Self service and "crush only" cars
Year Ended December 31,
2019
2018
% Change
309
25
591
310
28
562
(0.3)%
(10.7)%
5.2 % (1)
(1) Compared to the prior year, we have increased the number of self service and "crush only" vehicles purchased in 2019 to support growth in our operations.
The following table summarizes the components of the year-over-year increase in cash provided by operating activities (in millions):
Net cash provided by operating activities for the year ended December 31, 2018 $
711
Increase (decrease) due to:
Operating income
Non-cash depreciation and amortization expense
Impairment of net assets held for sale and goodwill
Cash paid for taxes
Cash paid for interest
Working capital accounts: (4)
Accounts receivable
Inventory
Accounts payable
Other operating activities
(1)
(2)
(3)
14
20
14
19
(5)
26
143
81
41
(5)
Net cash provided by operating activities for the year ended December 31, 2019 $
1,064
(1) Refer to the Results of Operations – Consolidated section for further information on the increase in operating income.
55
(2) Non-cash depreciation and amortization expense increased compared to the prior year period as discussed in the Results of Operations – Consolidated
section.
(3)
In the years ended December 31, 2019 and 2018, we recorded impairment charges on net assets held for sale and goodwill, noting that the 2019 charges
exceeded the prior year by $14 million. See "Net Assets Held for Sale" and "Intangible Assets" in Note 4, "Summary of Significant Accounting Policies"
to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on the impairment charges.
(4) Cash flows related to our primary working capital accounts can be volatile as the purchases, payments and collections can be timed differently from
period to period.
Inventory represented an incremental $143 million in cash inflows in 2019 as a result of deliberate inventory reduction efforts in the Europe and
North America segments to reflect organic revenue conditions, as disclosed in the procurement section above.
Accounts payable produced an incremental $81 million in cash inflows primarily due to timing effects related to our May 30, 2018 acquisition of
Stahlgruber. Additionally, we increased accounts payable through extension of vendor terms in North America. The supply chain financing programs in
Europe did not have a material impact on accounts payable in 2019.
Accounts receivable represented an incremental $26 million in cash inflows in 2019, primarily attributable to focus on collections in our
Specialty segment and U.K. operations, which was partially offset by timing effects from the Stahlgruber acquisition, and to a lesser extent, the unwind of
a receivables factoring program at Stahlgruber.
(5) Reflects a number of individually insignificant fluctuations in cash paid for other operating activities.
Net cash used in investing activities totaled $265 million for the year ended December 31, 2019, compared to $1.5 billion of cash used in investing
activities during the year ended December 31, 2018. We invested $27 million of cash, net of cash acquired, in business acquisitions during the year ended
December 31, 2019 compared to $1.2 billion during the year ended December 31, 2018. Property, plant and equipment purchases were $266 million in 2019
compared to $250 million in the prior year. The period over period increase in cash outflows for purchases of property, plant and equipment was primarily related
to our Europe segment. We received $18 million of net proceeds from divestitures of assets held for sale during the year ended December 31, 2019; no such
proceeds were received in 2018.
Net cash used in financing activities totaled $601 million for the year ended December 31, 2019, compared to net cash provided by financing activities of
$883 million during the year ended December 31, 2018. We received proceeds of $1.2 billion from our issuance of the Euro Notes (2026/28) during the year ended
December 31, 2018; no such proceeds were received in the current year. We repurchased $292 million of our common stock during the year ended December 31,
2019 compared to $60 million during the year ended December 31, 2018. We also paid $21 million of debt issuance costs during 2018, primarily related to the
issuance of the Euro Notes (2026/28); no such costs were incurred in 2019. During the year ended December 31, 2019, net repayments of our borrowings totaled
$301 million compared to $273 million during the year ended December 31, 2018.
We intend to continue to evaluate markets for potential growth through the internal development of distribution centers, processing and sales facilities,
and warehouses, through further integration of our facilities, and through selected business acquisitions. Our future liquidity and capital requirements will depend
upon numerous factors, including the costs and timing of our internal development efforts and the success of those efforts, the costs and timing of expansion of our
sales and marketing activities, and the costs and timing of future business acquisitions.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The following table sets forth a summary of our aftermarket and manufactured inventory procurement for the years ended December 31, 2018 and 2017
(in thousands):
North America
Europe
Specialty
Total
Year Ended December 31,
2018
2017
Change
$
1,393,700 $
1,367,600 $
3,635,400
1,087,600
2,355,300
1,006,600
26,100 (1)
1,280,100 (2)
81,000 (3)
$
6,116,700 $
4,729,500 $
1,387,200
(1)
In North America, aftermarket purchases during the year ended December 31, 2018 increased compared to the comparable prior year period to support
growth across our operations.
56
(2)
In our Europe segment, the increase in purchases during the year ended December 31, 2018 was primarily driven by (i) an $821 million increase
attributable to inventory purchases at Stahlgruber from the date of acquisition through December 31, 2018, (ii) a $181 million increase primarily
attributable to our Eastern Europe operations, of which $73 million was due to incremental inventory purchases in the first seven months of 2018 as a
result of our acquisition of an aftermarket parts distribution business in Poland in the third quarter of 2017; the remaining increase was primarily due to
branch expansion in Eastern Europe, and (iii) a $146 million increase in purchases at our Benelux operations, of which $41 million was attributable to
incremental inventory purchases in the first six months of 2018 as a result of our acquisitions of aftermarket parts distribution businesses in Belgium in
the third quarter of 2017. There was also an increase of $88 million in inventory purchases driven by the increase in the value of the euro and pound
sterling in 2018 compared to 2017.
(3)
In our Specialty segment, the acquisition of Warn in November 2017 added incremental purchases of $71 million during the year ended December 31,
2018, which includes purchases of aftermarket inventory and raw materials used in the manufacturing of specialty products. Specialty inventory purchases
also increased during the year ended December 31, 2018 compared to the prior year to support growth in our operations.
The following table sets forth a summary of our global wholesale salvage and self service procurement of vehicles for the years ended December 31, 2018
and 2017 (in thousands):
North America wholesale salvage cars and trucks
Europe wholesale salvage cars and trucks
Self service and "crush only" cars
Year Ended December 31,
2018
2017
% Change
310
28
562
310
25
542
—%
12.0%
3.7% (1)
(1) Compared to the prior year, we have increased the number of self service and "crush only" vehicles purchased in 2018 to support growth in our operations.
The following table summarizes the components of the year-over-year increase in cash provided by operating activities (in millions):
Net cash provided by operating activities for the year ended December 31, 2017 $
Increase (decrease) due to:
Operating income
Non-cash depreciation and amortization expense
Impairment of net assets held for sale and goodwill
Cash paid for taxes
Cash paid for interest
Working capital accounts: (4)
Accounts receivable
Inventory
Accounts payable
Pension funding
Other operating activities
519
37
64
33
(1)
(2)
(3)
73
(42)
39
72
(103)
(9)
28
(5)
(6)
(7)
Net cash provided by operating activities for the year ended December 31, 2018 $
711
(1) Refer to the Results of Operations - Consolidated section for further information on the increase in operating income.
(2) Non-cash depreciation and amortization expense increased compared to the prior year period as discussed in the Results of Operations - Consolidated
section.
57
(3)
In the fourth quarter of 2018, we recorded an impairment charge on the goodwill in our Aviation reporting unit. See "Intangible Assets" in Note 4,
"Summary of Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further
information on the impairment charge.
(4) Cash flows related to our primary working capital accounts can be volatile as the purchases, payments and collections can be timed differently from
period to period and can be influenced by factors outside of our control.
(5)
Includes an outflow of $116 million related to Stahlgruber, primarily resulting from the timing of the acquisition. Due to the timing of processing invoice
payments after the closing date, we assumed a larger payable balance but acquired more cash at closing. However, the cash acquired at closing is reflected
in the Investing section of the cash flow statement on the Acquisitions, net of cash and restricted cash acquired line.
(6) During the year ended December 31, 2018, we made a special contribution of $9 million to one of our North America pension plans. See Note 14,
"Employee Benefit Plans" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on our
pension plans.
(7) Reflects a number of individually insignificant fluctuations in cash paid for other operating activities.
Net cash used in investing activities totaled $1.5 billion for the year ended December 31, 2018, compared to $385 million of cash used in investing
activities during the year ended December 31, 2017. We invested $1.2 billion of cash, net of cash acquired, in business acquisitions during the year ended
December 31, 2018 compared to $513 million during the year ended December 31, 2017. We received net proceeds from the sale of our glass manufacturing
business totaling $301 million during the year ended December 31, 2017; no such proceeds were received in 2018. Property, plant and equipment purchases were
$250 million in 2018 compared to $179 million in the prior year. The period over period increase in cash outflows for purchases of property, plant and equipment
was primarily related to our North America and Europe segments. We had $28 million of proceeds from the disposals of property, plant and equipment in 2018
compared to $9 million in the prior year; the increase was primarily related to our North America segment. We invested $60 million in unconsolidated subsidiaries
in 2018 compared to $8 million in the prior year, primarily due to the $48 million Mekonomen rights issue in the fourth quarter of 2018; there was no rights
offering in 2017. During the year ended December 31, 2018, we received $37 million of deferred purchase price proceeds on receivables under our factoring
arrangement that was acquired in our Stahlgruber acquisition; no such proceeds were received in 2017. The arrangement was subsequently terminated in
December 2018.
Net cash provided by financing activities totaled $883 million for the year ended December 31, 2018, compared to net cash used in financing activities of
$113 million during the year ended December 31, 2017. We received proceeds of $1.2 billion from our issuance of the Euro Notes (2026/28) during the year ended
December 31, 2018; no such proceeds were received in the prior year. We repurchased $60 million of our common stock during 2018 following the Board of
Directors' authorization of a stock repurchase program in October 2018; we did not repurchase any common stock during 2017. We also paid $21 million of debt
issuance costs during 2018, primarily related to the issuance of the Euro Notes (2026/28), compared to $4 million paid during 2017 in connection with our
December 2017 amendment of our credit facilities. During the year ended December 31, 2018, net repayments of our borrowings totaled $273 million compared to
$115 million during the year ended December 31, 2017.
During the year ended December 31, 2018, foreign exchange rates decreased cash, cash equivalents and restricted cash by $77 million, compared to an
increase of $24 million in the prior year. The current year impact was primarily related to a $66 million decrease resulting from the decline in the euro exchange
rate between April 9, 2018, the date we received the proceeds from the Euro Notes (2026/28), and May 30, 2018, the date we paid the cash proceeds for the
Stahlgruber acquisition.
Off-Balance Sheet Arrangements and Future Commitments
Except as described below, we do not have any off-balance sheet arrangements or undisclosed borrowings or debt that would be required to be disclosed
pursuant to Item 303 of Regulation S-K under the Securities Exchange Act of 1934. Additionally, we do not have any synthetic leases.
As of December 31, 2019, there were letters of credit outstanding in the aggregate amount of $69 million.
We guarantee the residual values for the majority of our vehicles. Had we terminated all of our operating leases subject to these guarantees at
December 31, 2019, our portion of the guaranteed residual value would have totaled approximately $67 million. See Note 13, "Leases" to the consolidated
financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on leases.
In December 2019, we modified the shares of a noncontrolling interest of a subsidiary acquired in connection with the Stahlgruber acquisition and issued
new redeemable shares to the minority shareholder. The new redeemable shares contain 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. The put option is outside the control of the Company to exercise. See
"Stockholders'
58
Equity–Noncontrolling Interest" in Note 4, "Summary of Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this Annual
Report on Form 10-K for further information.
The following table represents our future commitments under contractual obligations as of December 31, 2019 (in millions):
Contractual obligations
Long-term debt (1) (2)
Finance lease obligations (3)
Operating leases (4)
Purchase obligations (5)
Other long-term obligations (6)
Total
Less than
1 Year
1-3 Years
3-5 Years
More than
5 Years
$
4,625.9 $
447.3 $
369.7 $
2,607.8 $
1,201.1
52.1
1,804.8
553.8
249.0
10.1
288.7
499.2
112.2
15.9
449.7
54.6
94.7
6.7
306.4
—
26.9
19.4
760.0
—
15.2
$
7,285.6 $
1,357.5 $
984.6 $
2,947.8 $
1,995.7
Total
(1)
(2)
(3)
(4)
(5)
(6)
Our long-term debt under contractual obligations above includes interest of $581 million on the balances outstanding as of December 31, 2019. The long-
term debt balance excludes debt issuance costs, as these expenses have already been paid. Interest on our senior notes, notes payable, and other long-term
debt is calculated based on the respective stated rates. Interest on our variable rate credit facilities is calculated based on the weighted average rates,
including the impact of interest rate swaps through their respective expiration dates, in effect for each tranche of borrowings as of December 31, 2019.
Future estimated interest expense for the next year, one to three years, and three to five years is $116 million, $225 million and $164 million, respectively.
Estimated interest expense beyond five years is $76 million.
Includes $614 million of U.S. Notes (2023) redeemed on January 10, 2020, inclusive of principal, an early-redemption premium and interest. Of this $614
million, $199 million is included in less than 1 year (reflecting the amount repaid with cash on hand), $105 million is included in 1-3 years (reflecting the
amount repaid using borrowings under the receivables securitization facility), and $310 million is included in 3-5 years (reflecting the amount repaid
using borrowings under the revolving credit facility).
Interest on finance lease obligations of $11 million is included based on incremental borrowing or implied rates. Future estimated interest expense for the
next year, one to three years, and three to five years is $1 million, $1 million and $1 million, respectively. Estimated interest expense beyond five years is
$9 million.
The operating lease payments above do not include certain tax, insurance and maintenance costs, which are also required contractual obligations under
our operating leases but are generally not fixed and can fluctuate from year to year. Also, we have excluded future minimum lease payments for leases
that have been signed but have not commenced as of December 31, 2019.
Our purchase obligations include open purchase orders for aftermarket inventory.
Our other long-term obligations consist of (i) estimated payments for our self-insurance reserves of $97 million, (ii) outstanding estimated payments of
$33 million on the repatriation of earnings as a result of the Tax Act, (iii) a total of $8 million of guaranteed dividend payments to be made in quarterly
installments through January 2024 to the minority shareholder of a subsidiary acquired in connection with the Stahlgruber acquisition, and (iv) $110
million representing primarily other asset purchase commitments and payments for deferred compensation plans.
The table above excludes amounts related to our defined benefit pension plans. As of December 31, 2019, the projected benefit obligation for our defined
benefit pension plans was $225 million, and the fair value of the related plan assets was $83 million. Total expected contributions to our pension plans, including
amounts that we expect to pay in benefits directly to participants, are $13 million for the year ended December 31, 2020. Benefit payments for our funded plans
will be made from plan assets, whereas benefit payments for our unfunded plans are made from cash flows from operating activities. See Note 14, "Employee
Benefit Plans" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information related to our pension plans,
including information related to expected benefit payments for the next 10 years and the plan assets available to satisfy those benefit payments.
59
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks arising from adverse changes in:
•
•
•
foreign exchange rates;
interest rates; and
commodity prices.
Foreign Exchange Rates
Foreign currency fluctuations may impact the financial results we report for the portions of our business that operate in functional currencies other than
the U.S. dollar. Our operations outside of the U.S. represented 50.3% and 47.9% of our revenue during 2019 and 2018, respectively. An increase or decrease in the
strength of the U.S. dollar against these currencies by 10% would result in a 5.0% change in our consolidated revenue and a 2.9% change in our operating income
for the year ended December 31, 2019. See our Results of Operations discussion in Part II, Item 7 of this Annual Report on Form 10-K for additional information
regarding the impact of fluctuations in exchange rates on our year over year results.
Additionally, we are exposed to foreign currency fluctuations with respect to the purchase of aftermarket products from foreign countries, primarily in
Europe and Asia. To the extent that our inventory purchases are not denominated in the functional currency of the purchasing location, we are exposed to exchange
rate fluctuations. In several of our operations, we purchase inventory from manufacturers in Taiwan in U.S. dollars, which exposes us to fluctuations in the
relationship between the local functional currency and the U.S. dollar, as well as fluctuations between the U.S. dollar and the Taiwan dollar. We hedge our
exposure to foreign currency fluctuations related to a portion of inventory purchases in our Europe operations, but the notional amount and fair value of these
foreign currency forward contracts at December 31, 2019 were immaterial. We do not currently attempt to hedge foreign currency exposure related to our foreign
currency denominated inventory purchases in our North America operations, and we may not be able to pass on any resulting price increases to our customers.
Other than with respect to a portion of our foreign currency denominated inventory purchases, we do not hold derivative contracts to hedge foreign
currency risk. Our net investment in foreign operations is partially hedged by the foreign currency denominated borrowings we use to fund foreign acquisitions;
however, our ability to use foreign currency denominated borrowings to finance our foreign operations may be limited based on local tax laws. We have elected
not to hedge the foreign currency risk related to the interest payments on foreign borrowings as we generate cash flows in the local currencies that can be used to
fund debt payments. As of December 31, 2019, we had outstanding borrowings of €500 million under our Euro Notes (2024), €1.0 billion under our Euro Notes
(2026/28), and £208 million, €229 million, CAD $130 million, and SEK 270 million under our revolving credit facilities. As of December 31, 2018, we had
outstanding borrowings of €500 million under our Euro Notes (2024), €1.0 billion under our Euro Notes (2026/28), and £290 million, €163 million, CAD $130
million, and SEK 275 million under our revolving credit facilities.
Interest Rates
Our results of operations are exposed to changes in interest rates primarily with respect to borrowings under our credit facilities, where interest rates are
tied to the prime rate, LIBOR or CDOR. Therefore, we implemented a policy to manage our exposure to variable interest rates on a portion of our outstanding
variable rate debt instruments through the use of interest rate swap contracts. These contracts convert a portion of our variable rate debt to fixed rate debt, matching
the currency, effective dates and maturity dates to specific debt instruments. Net interest payments or receipts from interest rate swap contracts are included as
adjustments to interest expense. All of our interest rate swap contracts have been executed with banks that we believe are creditworthy (Wells Fargo Bank, N.A.;
Bank of America, N.A.; Citizens, N.A.; HSBC Bank USA, N.A.; and Banco Bilbao Vizcaya Argentaria, S.A.).
As of December 31, 2019, we held eight interest rate swap contracts representing a total of $480 million of U.S. dollar-denominated notional amount
debt. Our interest rate swap contracts are designated as cash flow hedges and modify the variable rate nature of that portion of our variable rate debt. These swaps
have maturity dates ranging from January 2021 through June 2021. As of December 31, 2019, the fair value of the interest rate swap contracts was an asset of $3
million. The values of such contracts are subject to changes in interest rates.
In addition to these interest rate swaps, as of December 31, 2019 we held four cross currency swap agreements for a total notional amount of $467
million (€435 million) with maturity dates in October 2020 and January 2021. These cross currency swaps contain an interest rate swap component and a foreign
currency forward contract component that, combined with related intercompany financing arrangements, effectively convert variable rate U.S. dollar-denominated
borrowings into fixed rate euro-denominated borrowings. The swaps are intended to reduce uncertainty in cash flows in U.S. dollars and euros in connection with
intercompany financing arrangements. The cross currency swaps were also executed with banks we believe
60
are creditworthy (Wells Fargo Bank, N.A.; Bank of America, N.A.; and MUFG Bank, Ltd. ("MUFG") (formerly known as The Bank of Tokyo-Mitsubishi UFJ,
Ltd.)). As of December 31, 2019, the fair values of the interest rate swap components of the cross currency swaps were an immaterial asset and a liability of $1
million, and the fair values of the foreign currency forward components were an asset of $3 million and a liability of $23 million. The values of these contracts are
subject to changes in interest rates and foreign currency exchange rates.
In total, we had 59% of our variable rate debt under our credit facilities at fixed rates at December 31, 2019 compared to 57% at December 31, 2018. See
Note 10, "Long-Term Obligations" and Note 11, "Derivative Instruments and Hedging Activities" to the consolidated financial statements in Part II, Item 8 of this
Annual Report on Form 10-K for additional information.
At December 31, 2019, we had approximately $663 million of variable rate debt that was not hedged. Using sensitivity analysis, a 100 basis point
movement in interest rates would change interest expense by $7 million over the next twelve months. Redeeming the U.S. Notes (2023) in January 2020 increased
our unhedged variable rate debt by $415 million.
Commodity Prices
We are exposed to market risk related to price fluctuations in scrap metal and other metals (including precious metals such as platinum, palladium and
rhodium). Market prices of these metals affect the amount that we pay for our inventory and the revenue that we generate from sales of these metals. As both our
revenue and costs are affected by the price fluctuations, we have a natural hedge against the changes. However, there is typically a lag between the effect on our
revenue from metal price fluctuations and inventory cost changes, and there is no guarantee that the vehicle costs will decrease or increase at the same rate as the
metals prices. Therefore, we can experience positive or negative gross margin effects in periods of rising or falling metals prices, particularly when such prices
move rapidly. Additionally, if market prices were to change at a greater rate than our vehicle acquisition costs, we could experience a positive or negative effect on
our operating margin. The average of scrap metal prices for 2019 has decreased 28% over the average for 2018.
61
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
*****
INDEX TO FINANCIAL STATEMENTS
LKQ CORPORATION AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
62
Page
63
65
66
67
68
70
72
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of LKQ Corporation:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of LKQ Corporation and subsidiaries (the "Company") as of December 31, 2019 and
2018, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for each of the three years in the period ended
December 31, 2019, and the related notes and the financial statement schedule listed in the Index at Item 15. In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2020, expressed an unqualified opinion on the Company's
internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 4 to the financial statements, the Company has changed its method of accounting for leases in 2019 due to adoption of ASC 842,
Leases.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Goodwill Impairment Assessment – Refer to Note 4 to the financial statements.
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The
Company determines the fair value of its reporting units using a discounted cash flow model and the market approach, which require management to make
significant estimates and assumptions. The goodwill balance subject to the impairment assessments was $4.4 billion as of December 31, 2019, and is allocated to
four reporting units.
Auditing the estimates and assumptions that impacted the valuation of certain reporting units involved especially subjective judgment; specifically, the
forecasts of future revenue and profit margins (“forecasts”), the determination of market multiples, and the selection of discount rates.
How the Critical Audit Matter Was Addressed in the Audit
63
Our audit procedures related to the forecasts, determination of market multiples, and the selection of discount rates included the following, among others:
· We tested the effectiveness of controls over the annual goodwill impairment assessment, including those over the forecasts and the selection of the
discount rates and market multiples.
· We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts.
· We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to
management and the Board of Directors, and (3) analyst and industry reports of the Company and companies in its peer group.
· With the assistance of our fair value specialists, we evaluated the discount rates, including testing the underlying source information and the
mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rates selected by
management.
· With the assistance of our fair value specialists, we evaluated the market multiples, including testing the underlying source information and
mathematical accuracy of the calculations, and comparing the multiples selected by management to its guideline public companies.
/s/ DELOITTE & TOUCHE LLP
Chicago, IL
February 27, 2020
We have served as the Company's auditor since 1998.
64
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
Year Ended December 31,
2019
12,506,109 $
2018
11,876,674
$
Revenue
Cost of goods sold
Gross margin
Selling, general and administrative expenses
Restructuring and acquisition related expenses
Impairment of net assets held for sale and goodwill
Depreciation and amortization
Operating income
Other expense (income):
Interest expense
(Gain) loss on debt extinguishment
Interest income and other income, net
Total other expense, net
Income from continuing operations before provision for income taxes
Provision for income taxes
Equity in (losses) earnings of unconsolidated subsidiaries
Income from continuing operations
Net income (loss) from discontinued operations
Net income
Less: net income (loss) attributable to continuing noncontrolling interest
Less: net income attributable to discontinued noncontrolling interest
Net income attributable to LKQ stockholders
Basic earnings per share: (1)
Income from continuing operations
Net income (loss) from discontinued operations
Net income
Less: net income (loss) attributable to continuing noncontrolling interest
Less: net income attributable to discontinued noncontrolling interest
Net income attributable to LKQ stockholders
Diluted earnings per share: (1)
Income from continuing operations
Net income (loss) from discontinued operations
Net income
Less: net income (loss) attributable to continuing noncontrolling interest
Less: net income attributable to discontinued noncontrolling interest
Net income attributable to LKQ stockholders
2017
9,736,909
5,937,286
3,799,623
2,715,407
19,672
—
219,546
844,998
7,301,817
4,574,857
3,352,731
32,428
33,244
274,213
882,241
146,377
101,640
1,350
(8,917)
138,810
743,431
191,395
(64,471)
487,565
(4,397)
483,168
3,050
—
456
(23,725)
78,371
766,627
235,560
5,907
536,974
(6,746)
530,228
(3,516)
—
7,654,315
4,851,794
3,580,300
36,979
47,102
290,770
896,643
138,504
(128)
(32,755)
105,621
791,022
215,330
(32,277)
543,415
1,619
545,034
2,800
974
$
$
$
$
$
541,260 $
480,118 $
533,744
1.75 $
1.55 $
0.01
1.76
0.01
0.00
(0.01)
1.54
0.01
—
1.75 $
1.53 $
1.75
$
1.54
$
0.01
1.75
0.01
0.00
(0.01)
1.53
0.01
—
1.74 $
1.52 $
1.74
(0.02)
1.72
(0.01)
—
1.73
1.73
(0.02)
1.71
(0.01)
—
1.72
(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 consolidated financial statements.
65
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
Net income
Less: net income (loss) attributable to continuing noncontrolling interest
Less: net income attributable to discontinued noncontrolling interest
Net income attributable to LKQ stockholders
Year Ended December 31,
2019
2018
2017
$
545,034 $
483,168 $
2,800
974
3,050
—
530,228
(3,516)
—
541,260
480,118
533,744
Other comprehensive income (loss):
Foreign currency translation, net of tax
Net change in unrealized gains/losses on cash flow hedges, net of tax
Net change in unrealized gains/losses on pension plans, net of tax
Net change in other comprehensive income (loss) from unconsolidated subsidiaries
Other comprehensive (loss) income
6,704
(9,016)
(23,859)
236
(25,935)
350
697
(2,343)
(109,819)
(108,523)
200,596
Comprehensive income
Less: comprehensive income (loss) attributable to continuing noncontrolling interest
Less: comprehensive income attributable to discontinued noncontrolling interest
519,099
373,349
2,800
974
3,050
—
Comprehensive income attributable to LKQ stockholders
$
515,325 $
370,299 $
730,443
The accompanying notes are an integral part of the consolidated financial statements.
66
3,447
(6,035)
(1,309)
196,699
726,927
(3,516)
—
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents
Receivables, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Operating lease assets, net
Intangible assets:
Goodwill
Other intangibles, net
Equity method investments
Other noncurrent assets
Total assets
Current liabilities:
Accounts payable
Accrued expenses:
Liabilities and Stockholders' Equity
Accrued payroll-related liabilities
Refund liability
Other accrued expenses
Other current liabilities
Current portion of operating lease liabilities
Current portion of long-term obligations
Total current liabilities
Long-term operating lease liabilities, excluding current portion
Long-term obligations, excluding current portion
Deferred income taxes
Other noncurrent liabilities
Commitments and contingencies
Redeemable noncontrolling interest
Stockholders' equity:
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 319,927,243 shares issued and 306,731,328
shares outstanding at December 31, 2019; 318,417,821 shares issued and 316,146,114 shares outstanding at
December 31, 2018
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock, at cost; 13,195,915 shares at December 31, 2019 and 2,271,707 shares at December 31, 2018
Total Company stockholders' equity
Noncontrolling interest
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2019
2018
$
523,020 $
1,131,132
2,772,777
260,890
4,687,819
1,234,400
1,308,511
331,761
1,154,083
2,836,075
199,030
4,520,949
1,220,162
—
4,406,535
4,381,458
850,338
139,243
153,110
928,752
179,169
162,912
12,779,956 $
11,393,402
942,795 $
942,398
$
$
179,203
97,314
289,683
121,623
221,527
326,367
2,178,512
1,137,597
3,715,389
310,129
365,672
172,005
104,585
288,425
61,109
—
121,826
1,690,348
—
4,188,674
311,434
364,194
24,077
—
3,199
1,418,239
4,140,136
(200,885)
(351,813)
5,008,876
39,704
5,048,580
3,184
1,415,188
3,598,876
(174,950)
(60,000)
4,782,298
56,454
4,838,752
$
12,779,956 $
11,393,402
The accompanying notes are an integral part of the consolidated financial statements.
67
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Impairment of equity method investments
Impairment of net assets held for sale and goodwill
Stock-based compensation expense
Deferred income taxes
Other
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:
Receivables, net
Inventories
Prepaid income taxes/income taxes payable
Accounts payable
Other operating assets and liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
Proceeds from disposals of property, plant and equipment
Acquisitions, net of cash and restricted cash acquired
Proceeds from disposal of businesses
Investments in unconsolidated subsidiaries
Receipts of deferred purchase price on receivables under factoring arrangements
Other investing activities, net
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issuance costs
Proceeds from issuance of Euro Notes (2026/28)
Purchase of treasury stock
Borrowings under revolving credit facilities
Repayments under revolving credit facilities
Repayments under term loans
Borrowings under receivables securitization facility
Repayments under receivables securitization facility
Payment of notes issued and assumed debt from acquisitions
(Repayments) borrowings of other debt, net
Other financing activities, net
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash of continuing operations, beginning of period
Add: Cash, cash equivalents and restricted cash of discontinued operations, beginning of period
Cash, cash equivalents and restricted cash of continuing and discontinued operations, beginning of period
Cash, cash equivalents and restricted cash of continuing and discontinued operations, end of period
Less: Cash and cash equivalents of discontinued operations, end of period
Cash, cash equivalents and restricted cash, end of period
Year Ended December 31,
2019
2018
2017
$
545,034 $
483,168 $
530,228
314,406
294,077
230,203
41,057
47,102
27,695
7,109
(16,311)
26,419
15,460
25,776
3,712
26,574
1,064,033
(265,730)
16,045
(27,296)
18,469
(7,594)
—
1,253
70,895
33,244
22,760
(2,180)
8,466
241
(127,153)
(2,125)
(77,621)
6,967
710,739
(250,027)
27,659
(1,214,995)
—
(60,300)
36,991
1,733
—
—
22,832
(46,537)
8,683
(55,979)
(203,857)
8,376
45,136
(20,185)
518,900
(179,090)
8,707
(513,088)
301,297
(7,664)
—
5,243
(264,853)
(1,458,939)
(384,595)
—
—
(291,813)
605,708
(21,128)
1,232,100
(60,000)
1,667,325
(734,471)
(1,528,970)
(8,750)
36,600
(146,600)
(19,123)
(33,922)
(8,298)
(600,669)
(904)
197,607
337,250
—
337,250
534,857
6,470
(354,800)
10,120
(120)
(54,888)
(11,730)
5,086
882,995
(77,311)
57,484
279,766
—
279,766
337,250
—
(4,267)
—
—
839,171
(946,477)
(27,884)
11,245
(11,245)
—
19,706
7,184
(112,567)
23,512
45,250
227,400
7,116
234,516
279,766
—
$
528,387 $
337,250 $
279,766
The accompanying notes are an integral part of the consolidated financial statements.
68
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents
Restricted cash included in Other noncurrent assets
Cash, cash equivalents and restricted cash, end of period
Supplemental disclosure of cash paid for:
Income taxes, net of refunds
Interest
Supplemental disclosure of noncash investing and financing activities:
Stock issued in acquisitions
Noncash property, plant and equipment additions
Notes payable and other financing obligations, including notes issued, debt assumed and settlement of
pre-existing balances in connection with business acquisitions
Notes and other financing receivables in connection with disposals of business/investment
Notes issued in connection with purchase of noncontrolling interest
Contingent consideration liabilities
$
$
$
$
523,020 $
331,761 $
279,766
5,367
5,489
—
528,387 $
337,250 $
279,766
181,306 $
200,098 $
143,121
137,866
273,019
95,707
— $
251,334 $
10,154
16,518
47,887
105,566
—
14,196
6,627
—
—
3,107
—
18,122
59,045
4,000
—
6,234
The accompanying notes are an integral part of the consolidated financial statements.
69
BALANCE, January 1, 2017
Net income
Other comprehensive income
Vesting of restricted stock units,
net of shares withheld for
employee tax
Stock-based compensation
expense
Exercise of stock options
Tax withholdings related to net
share settlements of stock-
based compensation awards
Sale of subsidiary shares to
noncontrolling interest
BALANCE, December 31, 2017
Net income
Other comprehensive loss
Stock issued in acquisitions
Purchase of treasury stock
Vesting of restricted stock units,
net of shares withheld for
employee tax
Stock-based compensation
expense
Exercise of stock options
Tax withholdings related to net
share settlements of stock-
based compensation awards
Adoption of ASU 2018-02 (see
Note 4)
Capital contributions from, net
of dividends declared to,
noncontrolling interest
shareholder
Noncontrolling interests of
businesses acquired
BALANCE, December 31, 2018
Net income
Other comprehensive loss
Purchase of treasury stock
Vesting of restricted stock units,
net of shares withheld for
employee tax
Stock-based compensation
expense
Exercise of stock options
Tax withholdings related to net
share settlements of stock-
based compensation awards
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In thousands)
LKQ Stockholders
Common Stock
Treasury Stock
Shares
307,545 $
—
—
Amount
Shares
Amount
Additional
Paid-In Capital
3,075
—
—
— $
—
—
— $ 1,116,690 $
—
—
—
—
Retained
Earnings
2,590,359 $
533,744
—
Accumulated
Other
Comprehensive
(Loss) Income
Noncontrolling
Interest
Total
Stockholders'
Equity
(267,175) $
—
196,699
— $
3,442,949
(3,516)
—
530,228
196,699
749
—
867
(34)
7
—
9
—
—
309,127 $
—
—
8,056
—
—
3,091
—
—
81
—
—
—
—
—
— $
—
—
—
(2,272)
(4,332)
22,832
7,461
—
—
—
(1,200)
—
—
— $ 1,141,451 $
—
—
—
(60,000)
—
—
251,253
—
—
—
—
—
3,124,103 $
480,118
—
—
—
603
—
686
(54)
—
6
—
7
(1)
—
—
—
—
318,418 $
—
—
—
—
3,184
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(2,272)
$ (60,000) $ 1,415,188 $
—
—
(10,924)
—
—
(291,813)
—
—
—
719
—
927
7
—
9
—
—
—
—
—
—
(2,091)
27,695
9,046
(137)
(1)
—
—
(4,494)
(3,802)
22,760
5,296
(1,770)
—
—
—
—
—
(5,345)
5,345
12,000
8,484
3,050
$
4,206,653
(4,325)
22,832
7,470
(1,200)
12,000
483,168
(109,819)
251,334
(60,000)
(3,796)
22,760
5,303
(1,771)
—
810
—
—
—
—
—
—
—
—
—
—
—
810
—
—
—
—
(70,476) $
—
(109,819)
—
—
—
—
—
—
—
—
—
—
3,598,876 $
541,260
—
—
—
—
—
—
44,110
44,110
(174,950) $
56,454
$
4,838,752
—
(25,935)
—
—
—
—
—
3,774
—
—
—
—
—
545,034
(25,935)
(291,813)
(2,084)
27,695
9,055
—
(4,495)
The accompanying notes are an integral part of the consolidated financial statements.
70
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In thousands)
Capital contributions from, net
of dividends declared to,
noncontrolling interest
shareholder
Acquired noncontrolling interest
(1)
Purchase and modification of
noncontrolling interests (2)
BALANCE, December 31, 2019
—
—
—
—
—
319,927 $
—
3,199
—
—
—
—
—
—
—
—
(27,105)
—
—
—
—
—
—
(13,196)
$ (351,813)
$ 1,418,239 $
4,140,136 $
(200,885) $
(8,474)
10,365
(8,474)
10,365
(22,415)
39,704 $
(49,520)
5,048,580
(1) The amount acquired during 2019 relates to discontinued operations. See Note 3, "Discontinued Operations," for further details.
(2) The amount recorded in 2019 relates to (i) the purchase of noncontrolling interest unrelated to a business combination, and (ii) the modification of noncontrolling interest
shares. Refer to "Stockholders' Equity–Noncontrolling Interest" in Note 4, "Summary of Significant Accounting Policies," for further information.
The accompanying notes are an integral part of the consolidated financial statements.
71
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business
The financial statements represent the consolidation of LKQ Corporation, a Delaware corporation, and its subsidiaries. LKQ 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 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 the United Kingdom, Germany, the Benelux region (Belgium, Netherlands, and Luxembourg), Italy, Czech Republic,
Poland, Slovakia, Austria, 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. In total, we operate approximately 1,700 facilities.
Note 2. Business Combinations
During the year ended December 31, 2019, we completed seven acquisitions, including three wholesale businesses and one self service business in North
America, and three wholesale businesses in Europe. These acquisitions were not material to our results of operations or financial position as of and for the year
ended December 31, 2019. Total acquisition date fair value of the consideration for our acquisitions for the year ended December 31, 2019 was $63 million,
composed of $29 million of cash paid (net of cash acquired), $7 million for the estimated value of contingent payments to former owners (with maximum
payments totaling $8 million), $2 million of other purchase price obligations (non-interest bearing), $21 million of notes payable, and $5 million of pre-existing
balances considered to be effectively settled as a result of the acquisitions. In addition, we assumed $8 million of existing debt as of the acquisition dates.
On May 30, 2018, we acquired Stahlgruber, a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital
equipment and accessories with operations in Germany, Austria, Italy, Slovenia, and Croatia, with further sales to Switzerland. Total acquisition date fair value of
the consideration for our Stahlgruber acquisition was €1.2 billion ($1.4 billion), composed of €1.0 billion ($1.1 billion) of cash paid (net of cash acquired), and
€215 million ($251 million) of newly issued shares of LKQ common stock. We financed the acquisition with the proceeds from €1.0 billion ($1.2 billion) of senior
notes, the direct issuance to Stahlgruber's owner of 8,055,569 newly issued shares of LKQ common stock, and borrowings under our existing revolving credit
facility. We recorded $915 million ($908 million in 2018 and $7 million of adjustments in the six months ended June 30, 2019) of goodwill related to our
acquisition of Stahlgruber, of which we expected $300 million to be deductible for income tax purposes. In the period between the acquisition date and
December 31, 2018, Stahlgruber, which is reported in our Europe reportable segment, generated third party revenue of $1.1 billion and operating income of $52
million.
On May 3, 2018, the European Commission cleared the acquisition of Stahlgruber for the entire European Union, except with respect to the wholesale
automotive parts business in the Czech Republic. The acquisition of Stahlgruber’s Czech Republic wholesale business was referred to the Czech Republic
competition authority for review. On May 10, 2019, the Czech Republic competition authority approved our acquisition of Stahlgruber’s Czech Republic
wholesale business subject to the requirement that we divest certain of the acquired locations. We acquired Stahlgruber’s Czech Republic wholesale business on
May 29, 2019 and decided to divest all of the acquired locations. We immediately classified the business as discontinued operations because the business was
never integrated into our Europe segment; see Note 3, "Discontinued Operations" for further information. The Czech Republic wholesale business represents an
immaterial portion of Stahlgruber's revenue and profitability. There was no additional consideration beyond the previously remitted amounts for the Stahlgruber
transaction required to complete the acquisition of the Czech Republic wholesale business.
In addition to our acquisition of Stahlgruber, during the year ended December 31, 2018, we completed acquisitions of four wholesale businesses in North
America and nine wholesale businesses in Europe. Total acquisition date fair value of the consideration for these acquisitions was $99 million, composed of $85
million of cash paid (net of cash and restricted cash acquired), $11 million of notes payable, and $3 million for the estimated value of contingent payments to
former owners (with maximum potential payments totaling $5 million). During the year ended December 31, 2018, we recorded $68 million of goodwill related to
these acquisitions, of which we expected $4 million to be deductible for income tax purposes. In the period
72
between the acquisition dates and December 31 2018, these acquisitions generated third party revenue of $46 million and operating income of $3 million.
During the year ended December 31, 2017, we completed 26 acquisitions including 6 wholesale businesses in North America, 16 wholesale businesses in
Europe and 4 Specialty businesses. Our acquisitions in Europe included the acquisition of four aftermarket parts distribution businesses in Belgium in July 2017.
Our Specialty acquisitions included the acquisition of the aftermarket business of Warn, a leading designer, manufacturer and marketer of high performance
vehicle equipment and accessories, in November 2017.
Total acquisition date fair value of the consideration for our 2017 acquisitions was $542 million, composed of $510 million of cash paid (net of cash
acquired), $6 million for the estimated value of contingent payments to former owners (with maximum potential payments totaling $19 million), $5 million of
other purchase price obligations (non-interest bearing) and $20 million of notes payable. During the year ended December 31, 2017, we recorded $307 million of
goodwill related to these acquisitions, of which we expected $21 million to be deductible for income tax purposes. In the period between the acquisition dates and
December 31, 2017, these acquisitions generated revenue of $227 million and an operating loss of $2 million.
On October 4, 2016, we acquired substantially all of the business assets of Andrew Page, a distributor of aftermarket automotive parts in the U.K., out of
receivership. The acquisition was subject to regulatory approval by the CMA in the U.K. The CMA concluded its review on October 31, 2017 and required us to
divest less than 10% of the acquired locations. Total acquisition date fair value of the consideration for this acquisition was £16 million ($20 million). In
connection with the acquisition, we recorded a gain on bargain purchase of $10 million ($8 million recorded in 2016 and $2 million recorded in 2017), which is
presented in Interest income and other income, net in our Consolidated Statements of Income. We believe that we were able to acquire the net assets of Andrew
Page for less than fair value as a result of (i) Andrew Page's financial difficulties that put the company into receivership prior to our acquisition and (ii) a motivated
seller that desired to complete the sale in an expedient manner to ensure continuity of the business.
Our acquisitions are accounted for under the purchase method of accounting and are included in our consolidated financial statements from the dates of
acquisition. The purchase prices were allocated to the net assets acquired based upon estimated fair values at the dates of acquisition. The purchase price
allocations for the acquisitions made during the year ended December 31, 2019 are preliminary as we are in the process of determining the following: 1) valuation
amounts for certain receivables, inventories and fixed assets acquired; 2) valuation amounts for certain intangible assets acquired; 3) the acquisition date fair value
of certain liabilities assumed; and 4) the tax basis of the entities acquired. We have recorded preliminary estimates for certain of the items noted above and will
record adjustments, if any, to the preliminary amounts upon finalization of the valuations.
During the year ended December 31, 2019, the measurement period adjustments recorded for acquisitions completed in prior periods were not material.
The income statement effect of these measurement period adjustments that would have been recorded in previous reporting periods if the adjustments had been
recognized as of the acquisition dates was immaterial.
73
The purchase price allocations for the acquisitions completed during the year ended December 31, 2018 are as follows (in thousands):
Year Ended
December 31, 2018
Other Acquisitions (1)
Total
Stahlgruber
$
144,826 $
19,171 $
Receivables
Receivable reserves
Inventories
Prepaid expenses and other current assets
Property, plant and equipment
Goodwill
Other intangibles
Other noncurrent assets
Deferred income taxes
Current liabilities assumed
Debt assumed
Other noncurrent liabilities assumed (2)
Noncontrolling interest
Contingent consideration liabilities
Other purchase price obligations
Stock issued
Notes issued
Gains on bargain purchases (3)
Settlement of other purchase price obligations (non-
interest bearing)
Cash used in acquisitions, net of cash and restricted cash
acquired
(918)
14,021
1,851
5,711
64,637
35,159
37
(5,285)
(20,116)
(4,875)
(10,306)
—
(3,107)
3,623
—
(11,347)
(2,418)
163,997
(3,736)
394,259
12,821
277,003
972,890
320,414
16,662
(83,415)
(366,904)
(84,800)
(91,130)
(44,110)
(3,107)
(2,461)
(251,334)
(11,347)
(2,418)
(2,818)
380,238
10,970
271,292
908,253
285,255
16,625
(78,130)
(346,788)
(79,925)
(80,824)
(44,110)
—
(6,084)
(251,334)
—
—
—
1,711
1,711
$
1,127,446 $
87,549 $
1,214,995
(1) The amounts recorded during the year ended December 31, 2018 include a $5 million adjustment to increase other intangibles related to our Warn
acquisition and $4 million of adjustments to reduce other purchase price obligations related to other 2017 acquisitions.
(2) The amount recorded for our acquisition of Stahlgruber includes a $79 million liability for certain pension obligations.
(3) The amounts recorded during the year ended December 31, 2018 are due to the gains on bargain purchases related to (i) an acquisition in Europe
completed in the second quarter of 2017 as a result of changes in the acquisition date fair value of the consideration, and (ii) three acquisitions in Europe
completed during 2018.
The fair value of our intangible assets is based on a number of inputs, including projections of future cash flows, discount rates, assumed royalty rates and
customer attrition rates, all of which are Level 3 inputs. We used the relief-from-royalty method to value trade names, trademarks, software and other technology
assets, and we used the multi-period excess earnings method to value customer relationships. The relief-from-royalty method assumes that the intangible asset has
value to the extent that its owner is relieved of the obligation to pay royalties for the benefits received from the intangible asset. The multi-period excess earnings
method is based on the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset
charges. The fair value of our property, plant and equipment is determined using inputs such as market comparables and current replacement or reproduction costs
of the asset, adjusted for physical, functional and economic factors; these adjustments to arrive at fair value use unobservable inputs in which little or no market
data exists, and therefore, these inputs are considered to be Level 3 inputs. See Note 12, "Fair Value Measurements" for further information regarding the tiers in
the fair value hierarchy.
The acquisition of Stahlgruber expanded LKQ's geographic presence in continental Europe and serves as an additional strategic hub for our European
operations. In addition, the acquisition of Stahlgruber should allow for continued improvement in procurement, logistics and infrastructure optimization. The
primary objectives of our other acquisitions made during the years ended December 31, 2019 and 2018 were to create economic value for our stockholders by
enhancing our position as a
74
leading source for alternative collision and mechanical repair products and to expand into other product lines and businesses that may benefit from our operating
strengths.
When we identify potential acquisitions, we attempt to target companies with a leading market presence, an experienced management team and workforce
that provides a fit with our existing operations, and strong cash flows. For certain of our acquisitions, we have identified cost savings and synergies as a result of
integrating the company with our existing business that provide additional value to the combined entity. In many cases, acquiring companies with these
characteristics will result in purchase prices that include a significant amount of goodwill.
The following pro forma summary presents the effect of the businesses acquired during the year ended December 31, 2019 as though the businesses had
been acquired as of January 1, 2018, the businesses acquired during the year ended December 31, 2018 as though they had been acquired as of January 1, 2017,
and the businesses acquired during the year ended December 31, 2017 as though they had been acquired as of January 1, 2016. We have excluded the May 29,
2019 acquisition of the Czech Republic wholesale business as the business was never integrated into our Europe segment. The pro forma adjustments are based
upon unaudited financial information of the acquired entities (in thousands):
Revenue, as reported
Revenue of purchased businesses for the period prior to acquisition:
Stahlgruber
Other acquisitions
Pro forma revenue
Income from continuing operations, as reported (1)
Income from continuing operations of purchased businesses for the period prior to
acquisition, and pro forma purchase accounting adjustments:
Stahlgruber
Other acquisitions
Acquisition related expenses, net of tax (2)
Pro forma income from continuing operations
Less: Net income (loss) attributable to continuing noncontrolling interest, as reported
Less: Pro forma net income attributable to noncontrolling interest
Year Ended December 31,
2019
12,506,109 $
2018
11,876,674 $
2017
9,736,909
—
24,614
815,405
164,133
1,756,893
448,721
12,530,723 $
12,856,212 $
11,942,523
543,415 $
487,565 $
536,974
$
$
$
14,481
3,664
1,499
17,309
6,591
14,524
563,059
525,989
2,800
—
3,050
2,799
4,796
16,667
8,787
567,224
(3,516)
1,095
Pro forma income from continuing operations attributable to LKQ stockholders (3)
$
560,259 $
520,140 $
569,645
(1) 2018 amounts include interest expense for the period from April 9, 2018 through December 31, 2018 recorded on the senior notes issued in connection
with our acquisition of Stahlgruber.
(2)
Includes expenses related to acquisitions closed in the period and excludes expenses for acquisitions not yet completed.
(3) Excludes our acquisition of the Czech Republic wholesale business which is classified as discontinued operations.
Unaudited pro forma supplemental information is based upon accounting estimates and judgments that we believe are reasonable. The unaudited pro
forma supplemental information includes the effect of purchase accounting adjustments, such as the adjustment of inventory acquired to fair value, adjustments to
depreciation on acquired property, plant and equipment, adjustments to rent expense for above or below market leases, adjustments to amortization on acquired
intangible assets, adjustments to interest expense, and the related tax effects. The pro forma impact of our acquisitions also reflects the elimination of acquisition
related expenses, net of tax. Refer to Note 6, "Restructuring and Acquisition Related Expenses," for further information regarding our acquisition related expenses.
These pro forma results are not necessarily indicative of what would have occurred if the acquisitions had been in effect for the periods presented or of future
results.
Note 3. Discontinued Operations
Glass Manufacturing Business
75
On March 1, 2017, LKQ completed the sale of the glass manufacturing business of its PGW subsidiary to a subsidiary of Vitro S.A.B. de C.V. ("Vitro")
for a sales price of $301 million, including cash received of $316 million, net of cash disposed of $15 million. Related to this transaction, the remaining portion of
the Glass operating segment was combined with our Wholesale – North America operating segment, which is part of our North America reportable segment, in the
first quarter of 2017. See Note 16, "Segment and Geographic Information" for further information regarding our segments.
Upon execution of the Stock and Asset Purchase Agreement (the "Vitro Agreement") in December 2016, LKQ concluded that the glass manufacturing
business met the criteria to be classified as held for sale in LKQ's consolidated financial statements. In connection with the Vitro Agreement, the Company and
Vitro entered into a twelve month Transition Services Agreement commencing on the transaction date with two six-month renewal periods, a three-year Purchase
and Supply Agreement, and an Intellectual Property Agreement. The Purchase and Supply Agreement expires in the first quarter of 2020, while the Intellectual
Property Agreement has a perpetual term; as of December 31, 2019, the Transition Services Agreement had expired.
The following table summarizes the operating results of the Company’s discontinued operations related to the sale described above for the years ended
December 31, 2019, 2018 and 2017, as presented in Net income (loss) from discontinued operations in the Consolidated Statements of Income (in thousands):
Revenue
Cost of goods sold
Selling, general and administrative expenses
Operating (loss) income
Total other expense, net (1)
(Loss) income from discontinued operations before taxes
(Benefit) provision for income taxes
Equity in loss of unconsolidated subsidiaries
Loss from discontinued operations, net of tax
Loss on sale of discontinued operations, net of tax (2)
Net loss from discontinued operations
Year Ended December 31,
2019 (3)
2018
2017
— $
—
1,626
(1,626)
—
(1,626)
(1,572)
—
(54)
—
(54) $
— $
—
—
—
—
—
—
—
—
(4,397)
(4,397) $
111,130
100,084
8,369
2,677
1,204
3,881
3,598
(534)
(251)
(6,495)
(6,746)
$
$
(1) The Company elected to allocate interest expense to discontinued operations based on the expected debt to be repaid. Under this approach, allocated
interest from January 1, 2017 through the date of sale was $2 million. The other expenses, net were foreign currency gains and losses.
(2) In the first quarter of 2017, upon closing of the sale and write-off of the net assets of the glass manufacturing business, we recorded a pre-tax loss on sale
of $9 million, and a $4 million current tax benefit. The incremental loss primarily reflects a $6 million payable for intercompany sales from the glass
manufacturing business to the aftermarket automotive glass distribution business incurred prior to closing, which was paid by LKQ during the second
quarter of 2017, and capital expenditures in 2017 that were not reimbursed by the buyer. During the fourth quarter of 2017, we recorded an additional loss
on sale of $2 million as a result of post sale net working capital adjustments. During the fourth quarter of 2018, we recorded a final current tax expense
adjustment of $4 million to the loss on sale as a result of the completion of the tax return reporting the 2017 transaction. The adjustment was primarily
attributable to a valuation allowance recognized on the carryforward of a capital loss arising from the sale, the tax benefit of which is not certain to be
realized during the carryforward period.
(3) During the fourth quarter of 2019, we recorded a reserve related to a pre-disposition matter and the related deferred tax benefit, and we settled certain tax
matters with Vitro, which are reflected in the benefit for income taxes.
The glass manufacturing business had $4 million of operating cash outflows, $4 million of investing cash outflows mainly consisting of capital
expenditures, and $15 million of financing cash inflows made up of parent financing for the period from January 1, 2017 through March 1, 2017.
Pursuant to the Purchase and Supply Agreement, our aftermarket automotive glass distribution business agreed to source various products from Vitro's
glass manufacturing business annually for a three-year period beginning on March 1, 2017. Between January 1, 2017 and the sale date of March 1, 2017,
intercompany sales between the glass manufacturing business and the continuing aftermarket automotive glass distribution business of PGW, which were
eliminated in
76
consolidation, were $8 million. All purchases from Vitro, including those outside of the Purchase and Supply Agreement, for the years ended December 31, 2019,
2018 and 2017, were $30 million, $24 million and $42 million, respectively.
Czech Republic
As described in Note 2, "Business Combinations," we classified the acquired Stahlgruber Czech Republic wholesale business as discontinued operations.
We expect to divest the business within the first half of 2020, and thus, the net assets are reflected on the Consolidated Balance Sheets at the lower of fair value
less cost to sell or carrying value. As of December 31, 2019, the assets held for sale, liabilities held for sale, and noncontrolling interest are recorded within Prepaid
expenses and other current assets, Other current liabilities, and Noncontrolling interest, respectively, on the Consolidated Balance Sheets. As of the acquisition
date, we acquired $5 million of cash, assumed $6 million of existing debt and settled $6 million of pre-existing balances. During the year ended December 31,
2019, we recorded $2 million of net income from discontinued operations related to the business, of which $1 million was attributable to the noncontrolling
interest.
Fair value was based on the estimated selling price, the inputs of which included projected market multiples and any reasonable offers. Due to the
uncertainties in the estimation process, it is possible that actual results could differ from the estimates used in the Company's analysis. The inputs utilized in the fair
value estimate are classified as Level 3 within the fair value hierarchy. The fair value of the net assets was measured on a non-recurring basis as of December 31,
2019.
Note 4. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of LKQ Corporation and its subsidiaries. All intercompany transactions and
accounts have been eliminated.
Use of Estimates
In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America, we are required to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
See Note 5, "Revenue Recognition" for our accounting policies related to revenue.
Cost of Goods Sold
Our cost of goods sold includes: the price we pay for inventory, net of vendor discounts, rebates or other incentives; inbound freight and other
transportation costs to bring inventory into our facilities; and overhead costs related to purchasing, warehousing and transporting our products from our distribution
warehouses to our selling locations. For our salvage, remanufactured, and refurbished products, our cost of goods sold also includes direct and indirect labor,
equipment costs, depreciation, and other overhead to transform inventory into finished products suitable for sale. Cost of goods sold also includes expenses for our
service-type warranties and for our assurance-type warranty programs. See Note 5, "Revenue Recognition" for additional information related to our warranty
programs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include: personnel costs for employees in selling, general and administrative functions; costs to operate our
branch locations, corporate offices and back office support centers; costs to transport our products from our facilities to our customers; and other selling, general
and administrative expenses, such as professional fees, supplies, and advertising expenses. The costs included in selling, general and administrative expenses do
not relate to inventory processing or conversion activities, and, as such, are classified below the gross margin line in our Consolidated Statements of Income.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on hand, operating accounts, and deposits readily convertible to known amounts of cash. Restricted cash includes
cash for which the Company's ability to withdraw funds at any time is contractually limited. As of both December 31, 2019 and 2018, we had $5 million of
restricted cash that is recorded in Other noncurrent assets on the Consolidated Balance Sheets.
77
Receivables and Allowance for Doubtful Accounts
In the normal course of business, we extend credit to customers after a review of each customer's credit history. We recorded a reserve for uncollectible
accounts of approximately $53 million and $57 million at December 31, 2019 and 2018, respectively. The reserve is based upon the aging of the accounts
receivable, our assessment of the collectability of specific customer accounts and historical experience. Receivables are written off once collection efforts have
been exhausted. Recoveries of receivables previously written off are recorded when received.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts
receivable. We control our exposure to credit risk associated with these instruments by (i) placing our cash and cash equivalents with several major financial
institutions; (ii) holding high-quality financial instruments; and (iii) maintaining strict policies over credit extension that include credit evaluations, credit limits
and monitoring procedures. In addition, our overall credit risk with respect to accounts receivable is limited to some extent because our customer base is composed
of a large number of geographically diverse customers.
Inventories
We classify our inventory into the following categories: (i) aftermarket and refurbished products, (ii) salvage and remanufactured products, and (iii)
manufactured products.
An aftermarket product is a new vehicle product manufactured by a company other than the original equipment manufacturer. For all of our aftermarket
products, excluding our aftermarket automotive glass products, cost is established based on the average price we pay for parts; for our aftermarket automotive glass
products inventory, cost is established using the first-in first-out method. Inventory cost for all of our aftermarket products includes expenses incurred for freight in
and overhead costs; for items purchased from foreign companies, import fees and duties and transportation insurance are also included. Refurbished products are
parts that require cosmetic repairs, such as wheels, bumper covers and lights; LKQ will apply new parts, products or materials to these parts in order to produce the
finished product. Refurbished inventory cost is based upon the average price we pay for cores. The cost of our refurbished inventory also includes expenses
incurred for freight in, labor and other overhead costs.
A salvage product is a recycled vehicle part suitable for sale as a replacement part. Cost is established based upon the price we pay for a vehicle, including
auction, storage and towing fees, as well as expenditures for buying and dismantling the vehicle. Inventory carrying value is determined using the average cost to
sales percentage at each of our facilities and applying that percentage to the facility's inventory at expected selling prices, the assessment of which incorporates the
sales probability based on a part's number of days in stock and historical demand. The average cost to sales percentage is derived from each facility's historical
profitability for salvage vehicles. Remanufactured products are used parts that have been inspected, rebuilt, or reconditioned to restore functionality and
performance, such as remanufactured engines and transmissions. Remanufactured inventory cost is based upon the price paid for cores, which are recycled
automotive parts that are not suitable for sale as a replacement part without further processing, and also includes expenses incurred for freight in, direct
manufacturing costs and other overhead costs.
A manufactured product is a new vehicle product. Manufactured product inventory can be a raw material, work-in-process or finished good. Cost is
established using the first-in first-out method.
For all inventory, carrying value is recorded at the lower of cost or net realizable value. Net realizable value can be influenced by current anticipated
demand. If actual demand is lower than our estimates, additional reductions to inventory carrying value would be necessary in the period such determination is
made.
Inventories consist of the following (in thousands):
Aftermarket and refurbished products
Salvage and remanufactured products
Manufactured products
Total inventories
December 31,
2019
2,297,895 $
447,908
26,974
2018
2,309,458
503,199
23,418
2,772,777 $
2,836,075
$
$
Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of December 31, 2019,
manufactured products inventory was composed of $17 million of raw materials, $3 million
78
of work in process, and $6 million of finished goods. As of December 31, 2018, manufactured products inventory was composed of $17 million of raw materials,
$2 million of work in process, and $4 million of finished goods.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and improvements that extend the
useful life of the related asset are capitalized. As property, plant and equipment are sold or retired, the applicable cost and accumulated depreciation are removed
from the accounts and any resulting gain or loss thereon is recognized. Construction in progress consists primarily of building and land improvements at our
existing facilities. Depreciation is calculated using the straight-line method over the estimated useful lives or, in the case of leasehold improvements, the term of
the related lease and reasonably assured renewal periods, if shorter.
Our estimated useful lives are as follows:
Land improvements
Buildings and improvements
Machinery and equipment
Computer equipment and software
Vehicles and trailers
Furniture and fixtures
Property, plant and equipment consists of the following (in thousands):
Land and improvements
Buildings and improvements
Machinery and equipment
Computer equipment and software
Vehicles and trailers
Furniture and fixtures
Leasehold improvements
Finance lease assets
Less—Accumulated depreciation
Construction in progress
Total property, plant and equipment, net
10-20 years
20-40 years
3-20 years
3-10 years
3-10 years
5-7 years
December 31,
2019
2018
$
194,437 $
384,918
679,292
153,900
156,334
52,601
295,534
71,724
1,988,740
(807,680)
53,340
177,998
351,733
617,424
143,547
150,824
58,919
278,687
61,310
1,840,442
(685,751)
65,471
$
1,234,400 $
1,220,162
We record depreciation expense associated with our refurbishing, remanufacturing, manufacturing and furnace operations as well as our distribution
centers in Cost of goods sold in the Consolidated Statements of Income. We report depreciation expense resulting from restructuring programs in Restructuring and
acquisition related expenses. All other depreciation expense is reported in Depreciation and amortization. Total depreciation expense for the years ended December
31, 2019, 2018, and 2017 was $174 million, $157 million, and $129 million, respectively.
Intangible Assets
Intangible assets consist primarily of goodwill (the cost of purchased businesses in excess of the fair value of the identifiable net assets acquired) and
other specifically identifiable intangible assets, such as trade names, trademarks, customer and supplier relationships, software and other technology related assets,
and covenants not to compete.
Goodwill is tested for impairment at least annually, and we performed annual impairment tests during the fourth quarters of 2019, 2018 and 2017.
Goodwill impairment testing may also be performed on an interim basis when events or circumstances arise that may lead to impairment. The fair value estimates
of our reporting units are established using weightings of the results of a discounted cash flow methodology and a comparative market multiples approach.
Based on the annual goodwill impairment test in 2019, we determined no impairment existed as all of our reporting units had a fair value estimate which
exceeded the carrying value by at least 25%.
79
Based on our annual goodwill impairment test in 2018, we determined the carrying value of our Aviation reporting unit exceeded the fair value estimate
by more than the carrying value, thus we recorded an impairment charge of $33 million, which represented the total carrying value of goodwill in our Aviation
reporting unit (subsequently sold in the third quarter of 2019). The impairment charge was due to a decrease in the fair value estimate from the prior year fair value
estimate, primarily driven by a significant deterioration in the outlook for the Aviation reporting unit due to competition, customer financial issues and changing
market conditions for the airplane platforms that the business services, which lowered our projected gross margin and related future cash flows. We reported the
impairment charge in Impairment of net assets held for sale and goodwill in the Consolidated Statements of Income for the year ended December 31, 2018.
The changes in the carrying amount of goodwill by reportable segment are as follows (in thousands):
Balance as of January 1, 2018
North America
$
1,709,354 $
Europe
1,414,898 $
Specialty
412,259 $
Business acquisitions and adjustments to previously recorded goodwill
6,805
970,923
(4,838)
Impairment of goodwill
Exchange rate effects
Balance as of December 31, 2018
Business acquisitions and adjustments to previously recorded goodwill
Reclassified to net assets held for sale and discontinued operations
Disposal of business
Exchange rate effects
Balance as of December 31, 2019
Accumulated impairment losses as of December 31, 2019
The components of other intangibles, net are as follows (in thousands):
Total
3,536,511
972,890
(33,244)
(94,699)
(33,244)
(9,383)
—
(85,532)
—
216
$
1,673,532 $
2,300,289 $
407,637 $
4,381,458
38,913
—
—
15,099
(4,721)
(1,919)
5,599
(27,847)
—
—
—
(47)
54,012
(4,721)
(1,919)
(22,295)
$
$
1,718,044 $
2,280,901 $
407,590 $
4,406,535
(33,244) $
— $
— $
(33,244)
Intangible assets subject to amortization
Indefinite-lived intangible assets
Trademarks
Total
December 31, 2019 December 31, 2018
847,452
$
769,038 $
81,300
$
850,338 $
81,300
928,752
The components of intangible assets subject to amortization are as follows (in thousands):
December 31, 2019
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
December 31, 2018
Accumulated
Amortization
Trade names and trademarks
$
488,945 $
(119,957) $
368,988 $
496,166 $
(94,451) $
Customer and supplier relationships
580,052
(321,650)
258,402
593,517
(247,464)
Software and other technology
related assets
Covenants not to compete
Total
248,941
13,435
(108,979)
(11,749)
139,962
1,686
176,118
13,344
(79,283)
(10,495)
$
1,331,373 $
(562,335) $
769,038 $
1,279,145 $
(431,693) $
Net
401,715
346,053
96,835
2,849
847,452
The components of intangible assets acquired as part of our acquisitions in 2018 are as follows (in thousands):
80
Year Ended
December 31, 2018
Other Acquisitions (1)
Stahlgruber
Trade names and trademarks
Customer and supplier relationships
Software and other technology related assets
Covenants not to compete
Total
$
$
173,946 $
77,980
33,329
—
8,870 $
20,779
376
—
285,255 $
30,025 $
Total
182,816
98,759
33,705
—
315,280
(1) The amounts recorded during the year ended December 31, 2018 exclude amounts related to our 2017 acquisitions, including a $5 million adjustment to
increase other intangibles related to our 2017 acquisition of Warn.
The weighted-average amortization periods for our intangible assets acquired during the years ended December 31, 2018 and 2017 are as follows (in
years):
Trade names and trademarks
Customer and supplier relationships
Software and other technology related assets
Covenants not to compete
Total acquired finite-lived intangible assets
Year Ended
December 31, 2018
Other Acquisitions
Stahlgruber
Year Ended
December 31, 2017
Total
All Acquisitions
18.0
3.0
5.2
—
12.4
10.0
7.9
6.5
—
8.5
17.6
4.0
5.2
—
12.0
11.2
18.6
11.1
4.4
16.5
Our estimated useful lives for our finite-lived intangible assets are as follows:
Trade names and trademarks
Customer and supplier relationships
Software and other technology related assets
Covenants not to compete
Method of
Amortization
Straight-line
Accelerated
Straight-line
Straight-line
Useful Life
4-30 years
3-20 years
3-15 years
2-5 years
Amortization expense for intangibles was $140 million, $137 million, and $102 million during the years ended December 31, 2019, 2018, and 2017,
respectively. Estimated amortization expense for each of the five years in the period ending December 31, 2024 is $120 million, $93 million, $80 million, $70
million and $64 million, respectively.
Net Assets Held for Sale
During the year ended December 31, 2019, we committed to plans to sell certain businesses in our North America and Europe segments. As a result, these
businesses were classified as net assets held for sale and were required to be adjusted to the lower of fair value less cost to sell or carrying value, resulting in
impairment charges totaling $47 million for the year ended December 31, 2019 (presented in Impairment of net assets held for sale and goodwill in the
Consolidated Statements of Income).
In the third quarter of 2019, we completed the sales of two of these businesses, our aviation business in North America and a wholesale business in
Bulgaria. The disposed businesses were immaterial, generating annualized revenue of approximately $55 million prior to the divestiture.
Excluding the Stahlgruber Czech Republic wholesale business discussed in Note 3, "Discontinued Operations," as of December 31, 2019, there were $19
million of assets held for sale, including $5 million of goodwill that was reclassified as held for sale related to our Europe segment, and $9 million of liabilities
held for sale, which were recorded within Prepaid
81
expenses and other current assets and Other current liabilities, respectively, on the Consolidated Balance Sheets. We expect the remaining assets held for sale to be
disposed of during the next twelve months. The assets held for sale generated annualized revenue of $87 million during the year ended December 31, 2019.
We are required to record net assets of our held for sale businesses at the lower of fair value less cost to sell or carrying value. Fair values were based on
projected discounted cash flows and/or estimated selling prices. Management's assumptions for our discounted cash flow analysis of the businesses were based on
projected revenues and profits, tax rates, capital expenditures, working capital requirements and discount rates. For businesses for which we utilized estimated
selling prices to calculate the fair value, the inputs to our estimates included projected market multiples and any reasonable offers. Due to uncertainties in the
estimation process, it is possible that actual results could differ from the estimates used in our analysis. The inputs utilized in the fair value estimates are classified
as Level 3 within the fair value hierarchy. The fair values of the net assets were measured on a non-recurring basis as of December 31, 2019.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be
recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value.
Other than the impairment charges recorded upon the classification of certain businesses in our North America and Europe segments as held for sale discussed in
the "Net Assets Held for Sale" section above, there were no material adjustments to the carrying value of long-lived assets during the years ended December 31,
2019, 2018 or 2017.
Investments in Unconsolidated Subsidiaries
Our investment in unconsolidated subsidiaries was $139 million and $179 million as of December 31, 2019 and December 31, 2018, respectively.
Europe Segment
Our investment in unconsolidated subsidiaries in Europe was $122 million and $163 million as of December 31, 2019 and December 31, 2018,
respectively. We recorded equity in losses of $33 million and $65 million during the years ended December 31, 2019 and December 31, 2018, respectively, and
equity in earnings of $6 million during the year ended December 31, 2017 related to our investments in unconsolidated subsidiaries in our Europe segment, mainly
related to our investment in Mekonomen.
On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen for an aggregate purchase price of $181 million. In October 2018, we acquired
an additional $48 million of equity in Mekonomen at a discounted share price as part of its rights issue, increasing our equity interest to 26.6%. We are accounting
for our interest in Mekonomen using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over
the investee. As of December 31, 2019, our share of the book value of Mekonomen's net assets exceeded the book value of our investment in Mekonomen by $5
million; this difference is primarily related to Mekonomen's Accumulated Other Comprehensive Income balance as of our acquisition date in 2016. We are
recording our equity in the net earnings of Mekonomen on a one quarter lag.
During the years ended December 31, 2019 and 2018, we recognized other-than-temporary impairment charges of $40 million and $71 million,
respectively, which represented the difference in the carrying value and the fair value of our investment in Mekonomen. The fair value of our investment in
Mekonomen was determined using the Mekonomen share prices as of the dates of our impairment tests. The impairment charges are recorded in Equity in (losses)
earnings of unconsolidated subsidiaries in our Consolidated Statements of Income.
In May 2018, we received a cash dividend of $8 million (SEK 67 million) related to our investment in Mekonomen. Mekonomen announced in February
2019 that the Mekonomen Board of Directors proposed no dividend payment in 2019. The Level 1 fair value of our equity investment in the publicly traded
Mekonomen common stock at December 31, 2019 was $149 million (using the Mekonomen share price of SEK 93 as of December 31, 2019) compared to a
carrying value of $111 million.
In 2018, we participated in a rights issue with preferential rights for Mekonomen's existing shareholders, who were given the right to subscribe for four
new Mekonomen shares per seven existing owned shares at a discounted share price. The rights issue represented a derivative instrument related to our right to
acquire Mekonomen shares at a discount. We measured the derivative instrument at fair value, and we recorded a derivative loss of $5 million in Interest income
and other income, net in the Consolidated Statements of Income in October 2018 upon the settlement of the derivative instrument.
North America Segment
Our investment in unconsolidated subsidiaries in the North America segment was $18 million and $16 million as of December 31, 2019 and
December 31, 2018, respectively. The equity in earnings for the North America equity investments was
82
$1 million for the year ended December 31, 2019 and an immaterial amount for the year ended December 31, 2018; we did not have any equity in earnings in the
North America segment in 2017.
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 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 the warranty costs in Cost of
goods sold in our 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 Consolidated Balance Sheets based on the expected timing of the
related payments.
The changes in the warranty reserve are as follows (in thousands):
Balance as of January 1, 2018
Warranty expense
Warranty claims
Balance as of December 31, 2018
Warranty expense
Warranty claims
Balance as of December 31, 2019
$
$
23,151
43,682
(43,571)
23,262
58,253
(56,074)
25,441
Self-Insurance Reserves
We self-insure a portion of employee medical benefits under the terms of our employee health insurance program. We purchase certain stop-loss
insurance to limit our liability exposure. We also self-insure a portion of our property and casualty risk, which includes automobile liability, general liability,
directors and officers liability, workers' compensation, and property coverage, under deductible insurance programs. The insurance premium costs are expensed
over the contract periods. A reserve for liabilities associated with these losses is established for claims filed and claims incurred but not yet reported based upon
our estimate of ultimate cost, which is calculated using analysis of historical data. We monitor new claims and claim development as well as trends related to the
claims incurred but not reported in order to assess the adequacy of our insurance reserves. Total self-insurance reserves were $109 million and $105 million, of
which $54 million and $52 million was classified as current, as of December 31, 2019 and 2018, respectively, and are classified as Other accrued expenses on the
Consolidated Balance Sheets. The remaining balances of self-insurance reserves are classified as Other noncurrent liabilities, which reflects management's
estimates of when claims will be paid. We had outstanding letters of credit of $69 million and $65 million at December 31, 2019 and 2018, respectively, to
guarantee self-insurance claims payments. While we do not expect the amounts ultimately paid to differ significantly from our estimates, our insurance reserves
and corresponding expenses could be affected if future claims experience differs significantly from historical trends and assumptions.
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
On October 25, 2018, our Board of Directors authorized a stock repurchase program under which we were authorized to purchase up to $500 million of
our common stock from time to time through October 25, 2021. 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. Delaware law imposes restrictions on stock repurchases.
On October 25, 2019, our Board of Directors authorized an increase to our existing stock repurchase program under which the Company may purchase up
to an additional $500 million of our common stock from time to time through October 25, 2022; this extended date also applies to the original repurchase program.
With the increase, the Board of Directors has authorized a total of $1.0 billion of common stock repurchases.
83
During the year ended December 31, 2019, we repurchased 10.9 million shares of common stock for an aggregate price of $292 million. During 2018, we
repurchased 2.3 million shares of common stock for an aggregate price of $60 million. As of December 31, 2019, there was $648 million of remaining capacity
under our repurchase program. Repurchased shares are accounted for as treasury stock using the cost method.
Noncontrolling Interest
In July 2019, we purchased substantially all of the noncontrolling interest of a subsidiary acquired in connection with the Stahlgruber acquisition for a
purchase price of $19 million, which included the issuance of $14 million of notes payable. This purchase resulted in a net decrease to Noncontrolling interest of
$10 million and a decrease to Additional paid-in capital of $9 million in our consolidated financial statements as of December 31, 2019.
In December 2019, we modified the shares of a noncontrolling interest of a subsidiary acquired in connection with the Stahlgruber acquisition and issued
new redeemable shares to the minority shareholder. The new 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 the Company 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 new 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 the control of the
Company, we recorded a $24 million Redeemable noncontrolling interest at the put option's redemption value outside of permanent equity on our Consolidated
Balance Sheets. This transaction also resulted in a decrease to Additional paid-in capital of $18 million, a decrease to Noncontrolling interest of $12 million, and a
$7 million dividend payable ($2 million recorded in Other current liabilities and $5 million in Other noncurrent liabilities) in our consolidated financial statements
as of December 31, 2019. The redeemable noncontrolling interest and dividend payable represent noncash financing activities in our Consolidated Statements of
Cash Flows.
Income Taxes
Current income taxes are provided on income reported for financial reporting purposes, adjusted for transactions that do not enter into the computation of
income taxes payable in the same year. Deferred income taxes have been provided to show the effect of temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements. A valuation allowance is provided for deferred tax assets if it is more likely than not that these
items will either expire before we are able to realize their benefit or that future deductibility is uncertain. Provision is made for taxes on undistributed earnings of
foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested.
We recognize the benefits of uncertain tax positions taken or expected to be taken in tax returns in the provision for income taxes only for those positions
that are more likely than not to be realized. We follow a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the
tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50%
likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require
periodic adjustments and which may not accurately forecast actual outcomes. Our policy is to include interest and penalties associated with income tax obligations
in income tax expense.
During 2017, new tax legislation was signed into law making significant changes to the Internal Revenue Code. See Note 15, "Income Taxes" for further
information regarding the new tax law.
Rental Expense
We recognize rental expense on a straight-line basis over the respective lease terms, including reasonably assured renewal periods, for all of our operating
leases.
Foreign Currency Translation
For most of our foreign operations, the local currency is the functional currency. Assets and liabilities are translated into U.S. dollars at the period-ending
exchange rate. Statements of Income amounts are translated to U.S. dollars using monthly average exchange rates during the period. Translation gains and losses
are reported as a component of Accumulated other comprehensive income (loss) in stockholders' equity.
Recent Accounting Pronouncements
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Adoption of New Lease Standard
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2016-02, "Leases" ("ASU 2016-02"), which
represents the FASB Accounting Standards Codification Topic 842 ("ASC 842"), to increase transparency and comparability by recognizing lease assets and lease
liabilities on the Consolidated Balance Sheets and disclosing key information about leasing arrangements. The main difference between the prior standard and
ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under the prior standard.
We adopted the standard in the first quarter of 2019 using the modified retrospective approach and elected the transition package of practical expedients
permitted within the new standard, which, among other things, allows us to carryforward the historical lease classification. For leases with a term of 12 months or
less, we elected the short-term lease exemption, which allowed us to not recognize right-of-use assets or lease liabilities for qualifying leases existing at transition
and new leases we may enter into in the future. Additionally, we adopted the practical expedient to combine lease and non-lease components.
As of January 1, 2019, we recorded both an operating lease asset and operating lease liability of $1.3 billion. The preexisting deferred rent liability
balances from the historical straight-line treatment of operating leases was reclassified as a reduction of the lease asset upon adoption. The adoption of the standard
did not materially affect our Consolidated Statements of Income or Statements of Cash Flows as operating lease payments will still be an operating cash outflow
and capital lease payments will still be a financing cash outflow. The new standard did not have a material impact on our liquidity. The standard will have no
impact on our debt covenant compliance under our current agreements as the covenant calculations are based on the prior lease accounting rules.
Other Recently Adopted Accounting Pronouncements
During the first quarter of 2019, we adopted ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"), which
amends the hedge accounting recognition and presentation requirements in ASC 815 ("Derivatives and Hedging"). ASU 2017-12 significantly alters the hedge
accounting model by making it easier for an entity to achieve and maintain hedge accounting and provides for accounting that better reflects an entity's risk
management activities. We adopted the provisions of ASU 2017-12 by applying a modified retrospective approach to existing hedging relationships as of the
adoption date. The adoption of ASU 2017-12 did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-13, "Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement"
("ASU 2018-13"), which removes, modifies, and adds certain disclosure requirements in ASC 820. ASU 2018-13 is effective for fiscal years and interim periods
beginning after December 15, 2019; early adoption is permitted. We are in the process of evaluating the impact of this standard on our disclosures but do not
currently believe that it will have a material impact.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments" ("ASU 2016-13"), and in November 2018 issued a subsequent amendment, ASU 2018-19, "Codification Improvements to Topic 326, Financial
Instruments - Credit Losses" ("ASU 2018-19"). ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain
other instruments that are not measured at fair value through net income. ASU 2016-13 will replace today’s “incurred loss” approach with an “expected loss”
model for instruments measured at amortized cost. ASU 2018-19 will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet
credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope of this amendment that represent the contractual right to
receive cash. ASU 2016-13 and ASU 2018-19 should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic.
ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods therein. We do not anticipate the adoption of this accounting
standard will have a material impact on our consolidated financial statements.
Note 5. Revenue Recognition
The majority of our revenue is derived from the sale of vehicle parts. We recognize revenue when the products are shipped to, delivered to or picked up
by customers, which is the point when title has transferred and risk of ownership has passed.
Sources of Revenue
85
We report our revenue in two categories: (i) parts and services and (ii) other. The following table sets forth our revenue by category, with our parts and
services revenue further disaggregated by reportable segment (in thousands):
North America
Europe
Specialty
Parts and services
Other
Total revenue
Year Ended December 31,
2019
2018
2017
$
4,600,903 $
4,558,220 $
5,817,547
1,459,396
5,202,231
1,472,956
11,877,846
11,233,407
628,263
643,267
$
12,506,109 $
11,876,674 $
4,278,531
3,628,906
1,301,197
9,208,634
528,275
9,736,909
Parts and Services
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 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.
In North America, our vehicle replacement products include sheet metal collision parts such as doors, hoods, and fenders; bumper covers; head and tail
lamps; automotive glass products such as windshields; mirrors and grilles; wheels; and large mechanical items such as engines and transmissions. In Europe, our
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. In our Specialty operations, we serve six product segments: truck and off-road; speed and
performance; RV; towing; wheels, tires and performance handling; and miscellaneous accessories.
Our service-type warranties typically have service periods ranging from 6 months to 36 months. Under FASB Accounting Standards Codification Topic
ASC 606 ("ASC 606"), 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 thousands):
Balance as of January 1, 2018
Additional warranty revenue deferred
Warranty revenue recognized
Balance as of December 31, 2018
Additional warranty revenue deferred
Warranty revenue recognized
Balance as of December 31, 2019
$
$
19,465
38,736
(34,195)
24,006
43,381
(40,320)
27,067
Other Revenue
Revenue from other sources includes 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 our furnace operations. We derive scrap metal and other precious metals from several sources,
including vehicles that have been used in both our wholesale and self service recycling operations and from OEMs and other entities that contract with us for
secure disposal of "crush only" vehicles. The sale of hulks in our wholesale and self service recycling operations represents one performance obligation, and
revenue is recognized based on a price per weight when the customer (processor) collects the scrap. Some adjustments may occur when the customer weighs the
scrap at their location, and revenue is adjusted accordingly.
Revenue by Geographic Area
See Note 16, "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. Under ASC 606 we are required to select the “expected value method” or the
“most likely amount” method in order to estimate
86
variable consideration. We utilize both methods in practice 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 $97 million and $52 million, respectively, as of December 31, 2019, and $105
million and $56 million, respectively, as of December 31, 2018. The refund liability is presented separately on the balance sheet 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 which are recorded in Receivables, net on the Consolidated Balance Sheets. We recorded a reserve for our variable consideration of
$108 million and $103 million as of December 31, 2019 and December 31, 2018, respectively. While other customer incentive programs exist, we characterize
them as material rights in the context of our sales transactions. We consider these programs to be immaterial to our consolidated financial statements.
Contract Costs
Under ASC 340, "Other Assets and Deferred Costs," we have elected to recognize incremental costs of obtaining a contract (commissions earned by our
sales representatives on product sales) as an expense when incurred, as we believe the amortization period of the asset would be one year or less due to the short-
term nature of our contracts.
Sales Taxes
We present taxes assessed by governmental authorities collected from customers on a net basis. Therefore, the taxes are excluded from revenue in our
Consolidated Statements of Income and are shown as a current liability on our Consolidated Balance Sheets until remitted.
Note 6. Restructuring and Acquisition Related Expenses
Acquisition Related Expenses
Acquisition related expenses, which include external costs such as legal, accounting and advisory fees, were $2 million for the year ended December 31,
2019.
Acquisition related expenses for the year ended December 31, 2018 were $18 million, which included external costs primarily related to our May 2018
acquisition of Stahlgruber.
Acquisition related expenses totaled $15 million for the year ended December 31, 2017. Acquisition related expenses for 2017 included $5 million of
costs for our acquisition of Andrew Page, primarily related to legal and other professional fees associated with the CMA review. The remaining acquisition related
costs for the year ended December 31, 2017 consisted of external costs for (i) completed acquisitions, (ii) pending acquisitions as of December 31, 2017, including
$4 million related to Stahlgruber, and (iii) potential acquisitions that were terminated.
2019 Global Restructuring Program
In the second quarter of 2019, we began implementing a cost reduction initiative, covering all three of our reportable segments, designed to eliminate
underperforming assets and cost inefficiencies. 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 earlier than the end of the previously estimated useful lives.
During the year ended December 31, 2019, we incurred $37 million of restructuring expenses primarily related to inventory write-downs, employee-
related costs and facility exit costs. Of these expenses, $17 million, primarily related to branch consolidation and brand rationalization within our Andrew Page
operations, was recorded within Cost of goods sold in the Consolidated Statement of Income during the year ended December 31, 2019, and $20 million was
recorded within Restructuring and acquisition related expenses. We currently expect to incur additional expenses of between $5 million and $10 million through
the end of 2020 to complete the program.
Acquisition Integration Plans
87
During the year ended December 31, 2019, we incurred $18 million of restructuring expenses primarily related to our acquisition integration efforts in our
Europe segment. These expenses included $14 million related to the integration of our acquisition of Andrew Page, including $4 million within Cost of goods sold
in the Consolidated Statement of Income.
During the year ended December 31, 2018, we incurred $14 million of restructuring expenses. Expenses incurred during the year ended December 31,
2018 primarily consisted of $10 million related to the integration of our acquisition of Andrew Page and $3 million related to our Specialty segment. These
integration activities included the closure of duplicate facilities and termination of employees.
During the year ended December 31, 2017, we incurred $5 million of restructuring expenses. Expenses incurred during the year ended December 31, 2017
were primarily a result of our ongoing integration activities in our North America and Specialty segments. Expenses incurred were primarily related to facility
closure and the merger of existing facilities into larger distribution centers.
We expect to incur additional expenses related to the integration of certain of our acquisitions into our existing operations in 2020. These integration
activities are expected to include the closure of duplicate facilities, rationalization of personnel in connection with the consolidation of overlapping facilities with
our existing business, and moving expenses. Future expenses to complete these integration plans are expected to be less than $5 million.
1 LKQ Europe Program
In September 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 will reorganize 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 currently expect to incur between $45 million and $55 million in personnel and inventory
related restructuring charges through 2024 as a result of executing the 1 LKQ Europe program. In future periods, we may identify additional initiatives and projects
under the 1 LKQ Europe program 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.
Note 7. Stock-Based Compensation
In order to attract and retain employees, non-employee directors, consultants, and other persons associated with us, we grant equity-based awards under
the LKQ Corporation 1998 Equity Incentive Plan (the “Equity Incentive Plan”). The total number of shares approved by our stockholders for issuance under the
Equity Incentive Plan is 70 million shares, subject to antidilution and other adjustment provisions. We have granted restricted stock units ("RSUs"), stock options,
and restricted stock under the Equity Incentive Plan. Of the shares approved by our stockholders for issuance under the Equity Incentive Plan, 10 million shares
remained available for issuance as of December 31, 2019. We expect to issue new or treasury shares of common stock to cover past and future equity grants.
RSUs
The RSUs we have issued vest over periods of up to five years, subject to a continued service condition. Currently outstanding RSUs (other than PSUs,
which are described below) contain either a time-based vesting condition or a combination of a performance-based vesting condition and a time-based vesting
condition, in which case both conditions must be met before any RSUs vest. For all of the RSUs containing a performance-based vesting condition, the Company
must report positive diluted earnings per share, subject to certain adjustments, during any fiscal year period within five years following the grant date. Each RSU
converts into one share of LKQ common stock on the applicable vesting date. The grant date fair value of RSUs is based on the market price of LKQ stock on the
grant date.
Starting with our 2019 grants, participants who are eligible for retirement (defined as a voluntary separation of service from the Company after the
participant has attained at least 60 years of age and completed at least five years of service) will continue to vest in their awards following retirement; if retirement
occurs during the first year of the vesting period (for RSUs subject to a time-based vesting condition) or the first year of the performance period (for RSUs with a
performance-based vesting condition), the participant vests in a prorated amount of the RSU grant based on the portion of the year employed. For our RSU grants
prior to 2019, participants forfeit their unvested shares upon retirement.
The Compensation Committee of our Board of Directors (the "Compensation Committee") approved the grant of 270,388; 189,204; and 235,537 RSUs to
our executive officers that included both a performance-based vesting condition and a time-based vesting condition in 2019, 2018, and 2017, respectively. The
performance-based vesting conditions for the 2019, 2018, and 2017 grants to our executive officers have been satisfied.
88
The fair value of RSUs that vested during the years ended December 31, 2019, 2018, and 2017 was $22 million, $27 million, and $28 million,
respectively; the fair value of RSUs vested is based on the market price of LKQ stock on the date vested.
The following table summarizes activity related to our RSUs under the Equity Incentive Plan for the year ended December 31, 2019:
Unvested as of January 1, 2019
Granted (2)
Vested
Forfeited / Canceled
Unvested as of December 31, 2019
Expected to vest after December 31, 2019
Number
Outstanding
1,475,682 $
1,021,535 $
(796,936) $
(88,255) $
1,612,026 $
1,458,089 $
Weighted
Average
Grant Date
Fair Value
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate Intrinsic
Value
(in thousands) (1)
34.94
27.82
32.50
33.38
31.72
31.75
2.5 $
52,054
(1) The aggregate intrinsic value of expected to vest RSUs represents the total pretax intrinsic value (the fair value of the Company'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 RSUs vested. This amount changes based on the
market price of the Company’s common stock.
(2) The weighted average grant date fair value of RSUs granted during the years ended December 31, 2018 and 2017 was $42.58 and $32.15, respectively.
In 2019, we granted performance-based three-year RSUs ("PSUs") to certain employees, including our executive officers, under our Equity Incentive
Plan. As these awards are performance-based, the exact number of shares to be paid out may be up to twice the grant amount, depending on the Company's
performance and the achievement of certain performance metrics (adjusted earnings per share, average organic parts and services revenue growth, and average
return on invested capital) over the three year period ending December 31, 2021. In 2019, we also granted an immaterial amount of performance-based RSUs to
employees that have different performance metrics than those described above.
The following table summarizes activity related to our PSUs under the Equity Incentive Plan for the year ended December 31, 2019:
Unvested as of January 1, 2019
Granted (2)
Unvested as of December 31, 2019
Expected to vest after December 31, 2019
Number
Outstanding
— $
136,170 $
136,170 $
136,170 $
Weighted
Average
Grant Date
Fair Value
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate Intrinsic
Value
(in thousands) (1)
—
27.69
27.69
27.69
2.3 $
4,861
(1) The aggregate intrinsic value of expected to vest PSUs represents the total pretax intrinsic value (the fair value of the Company's stock on the last day of
each period multiplied by the number of units at target) that would have been received by the holders had all PSUs vested. This amount changes based on
the market price of the Company’s common stock and the achievement of the performance metrics relative to the established targets.
(2) Represents the number of PSUs at target payout.
Stock Options
Stock options vest over periods of up to five years, subject to a continued service condition. Stock options expire either six years or ten years from the
date they are granted. No options were granted during 2019 and 2018. No options vested during the year ended December 31, 2019; all of our outstanding options
are fully vested.
The following table summarizes activity related to our stock options under the Equity Incentive Plan for the year ended December 31, 2019:
89
Balance as of January 1, 2019
Exercised
Canceled
Balance as of December 31, 2019
Exercisable as of December 31, 2019
Number
Outstanding
Weighted
Average Exercise
Price
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate Intrinsic
Value
(in thousands) (1)
1,051,494 $
(926,809) $
(10,091) $
114,594 $
114,594 $
10.15
9.77
21.25
12.26
12.26
$
19,725
0.1 $
0.1 $
2,686
2,686
(1) The aggregate intrinsic value of outstanding and exercisable options represents the total pretax intrinsic value (the difference between the fair value of the
Company's stock on the last day of each period and the exercise price, multiplied by the number of options where the fair value exceeds the exercise
price) that would have been received by the option holders had all option holders exercised their options as of the last day of the period indicated. This
amount changes based on the market price of the Company’s common stock. The aggregate intrinsic value of stock options exercised during the years
ended December 31, 2018 and 2017 was $18 million and $21 million, respectively.
Stock-Based Compensation Expense
For the RSUs that contain both a performance-based vesting condition and a time-based vesting condition, we recognize compensation expense under the
accelerated attribution method, pursuant to which expense is recognized over the requisite service period for each separate vesting tranche of the award. During the
years ended December 31, 2019, 2018, and 2017, we recognized $11 million, $8 million, and $7 million, respectively, of stock based compensation expense related
to the RSUs containing a performance-based vesting condition. For all other awards, which are subject to only a time-based vesting condition, we recognize
compensation expense on a straight-line basis over the requisite service period of the entire award. Forfeitures are recorded as they occur.
The components of pre-tax stock-based compensation expense for our continuing operations are as follows (in thousands):
RSUs
Stock options and other
Total stock-based compensation expense
Year Ended December 31,
2019
2018
2017
$
$
27,695 $
22,760 $
—
—
27,695 $
22,760 $
22,826
6
22,832
The following table sets forth the classification of total stock-based compensation expense included in our Consolidated Statements of Income for our
continuing operations (in thousands):
Cost of goods sold
Selling, general and administrative expenses
Total stock-based compensation expense
Income tax benefit
Total stock-based compensation expense, net of tax
Year Ended December 31,
2019
2018
2017
477 $
469 $
27,218
27,695
(6,227)
22,291
22,760
(5,220)
21,468 $
17,540 $
434
22,398
22,832
(5,459)
17,373
$
$
We have not capitalized any stock-based compensation costs during the years ended December 31, 2019, 2018, and 2017.
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As of December 31, 2019, unrecognized compensation expense related to unvested RSUs and PSUs is expected to be recognized as follows (in
thousands):
2020
2021
2022
2023
2024
Total unrecognized compensation expense
$
$
16,776
10,863
6,054
2,641
182
36,516
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 target.
Note 8. Earnings Per Share
Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share
incorporate the incremental shares issuable upon the assumed exercise of stock options and the assumed vesting of RSUs. Certain of our RSUs and stock options
were excluded from the calculation of diluted earnings per share because they were antidilutive, but these equity instruments could be dilutive in the future.
The following chart sets forth the computation of earnings per share (in thousands, except per share amounts):
Income from continuing operations
Denominator for basic earnings per share—Weighted-average shares outstanding
Effect of dilutive securities:
RSUs
PSUs
Stock options
Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding
Basic earnings per share from continuing operations
Diluted earnings per share from continuing operations (1)
Year Ended December 31,
2019
2018
2017
$
543,415 $
487,565 $
310,155
314,428
393
—
421
310,969
1.75 $
1.75 $
409
—
1,012
315,849
1.55 $
1.54 $
$
$
536,974
308,607
544
—
1,498
310,649
1.74
1.73
(1) Diluted earnings per share from continuing operations was computed using the treasury stock method for dilutive securities.
The following table sets forth the number of employee stock-based compensation awards outstanding but not included in the computation of diluted
earnings per share because their effect would have been antidilutive for the years ended December 31, 2019, 2018, and 2017 (in thousands):
Antidilutive securities:
RSUs
Stock options
Year Ended December 31,
2019
2018
2017
586
24
410
8
37
39
91
Note 9. Accumulated Other Comprehensive Income (Loss)
The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands):
Foreign
Currency
Translation
Unrealized Gain
(Loss)
on Cash Flow
Hedges
Unrealized (Loss) Gain
on Pension Plans
Other Comprehensive
(Loss) Income from
Unconsolidated
Subsidiaries
Accumulated
Other
Comprehensive
(Loss) Income
Balance at January 1, 2017
$
(272,529) $
8,091 $
(2,737)
$
— $
Pretax income (loss)
Income tax effect
Reclassification of unrealized loss (gain)
Reclassification of deferred income taxes
Disposal of business, net
Other comprehensive loss from
unconsolidated subsidiaries
206,451
(7,366)
—
—
1,511
—
(44,550)
16,390
50,090
(18,483)
—
—
361
(100)
(3,519)
659
(3,436)
—
Balance at December 31, 2017
$
(71,933) $
11,538 $
(8,772)
$
Pretax (loss) income
Income tax effect
Reclassification of unrealized gain
Reclassification of deferred income taxes
Other comprehensive loss from
unconsolidated subsidiaries
Adoption of ASU 2018-02
(113,030)
4,507
—
—
—
2,859
37,552
(8,846)
(37,009)
8,653
—
2,486
1,132
(403)
(54)
22
—
—
—
—
—
—
—
(1,309)
(1,309)
$
—
—
—
—
(2,343)
—
(267,175)
162,262
8,924
46,571
(17,824)
(1,925)
(1,309)
(70,476)
(74,346)
(4,742)
(37,063)
8,675
(2,343)
5,345
Balance at December 31, 2018
$
(177,597) $
14,374 $
(8,075)
$
(3,652)
$
(174,950)
Pretax income (loss)
Income tax effect
Reclassification of unrealized gain
Reclassification of deferred income taxes
Disposal of business
Other comprehensive income from
unconsolidated subsidiaries
7,083
—
—
—
(379)
23,850
(5,579)
(35,686)
8,399
—
—
—
(31,801)
8,579
(782)
145
—
—
—
—
—
—
—
(868)
3,000
(36,468)
8,544
(379)
236
236
Balance at December 31, 2019
$
(170,893)
$
5,358
$
(31,934)
$
(3,416)
$
(200,885)
The amounts of unrealized gains and losses on our Cash Flow Hedges reclassified to our Consolidated Statements of Income are as follows (in
thousands):
Year Ended
December 31
Unrealized gains on interest rate swaps
Unrealized gains on cross currency swaps
Unrealized gains (losses) on cross currency swaps (1)
Total
Interest expense
Interest expense
Interest income and other income, net
$
5,872 $
5,482 $
15,794
14,020
11,105
20,422
$
35,686 $
37,009 $
373
6,835
(57,298)
(50,090)
Classification
2019
2018
2017
(1) The amounts reclassified to Interest income and other income, net in our Consolidated Statements of Income offset the impact of the remeasurement of
the underlying transactions.
Net unrealized losses related to our pension plans were reclassified to Interest income and other income, net in our Consolidated Statements of Income
during each of the years ended December 31, 2019 and 2018.
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 Consolidated Statements of Income.
92
During the first quarter of 2018, we adopted ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income" ("ASU 2018-02"), which allowed a reclassification from Accumulated other comprehensive income (loss) to Retained earnings for stranded tax effects
resulting from the reduction of the U.S. federal statutory income tax rate to 21% from 35% due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "Tax
Act"). As a result of the adoption of ASU 2018-02 in the first quarter of 2018, we recorded a $5 million reclassification to increase Accumulated other
comprehensive income (loss) and decrease Retained earnings.
Note 10. Long-Term Obligations
Long-term obligations consist of the following (in thousands):
Senior secured credit agreement:
Term loans payable
Revolving credit facilities
U.S. Notes (2023)
Euro Notes (2024)
Euro Notes (2026/28)
Receivables securitization facility
Notes payable through October 2030 at weighted average interest rates of 3.2% and 2.0%, respectively
Finance lease obligations at weighted average interest rates of 4.1% and 4.5%, respectively
Other debt at weighted average interest rates of 1.8% and 1.8%, respectively
Total debt
Less: long-term debt issuance costs
Less: current debt issuance costs
Total debt, net of debt issuance costs
Less: current maturities, net of debt issuance costs
Long term debt, net of debt issuance costs
December 31,
2019
2018
$
341,250 $
1,268,008
600,000
560,650
1,121,300
—
26,971
40,837
113,010
350,000
1,387,177
600,000
573,350
1,146,700
110,000
23,056
39,966
117,448
4,072,026
4,347,697
(29,990)
(280)
4,041,756
(326,367)
$
3,715,389 $
(36,906)
(291)
4,310,500
(121,826)
4,188,674
The scheduled maturities of long-term obligations outstanding at December 31, 2019 are as follows (in thousands):
2020 (1)
2021 (1)
2022
2023
2024 (1)
Thereafter
Total debt (2)
$
$
326,648
133,951
25,912
21,650
2,427,714
1,136,151
4,072,026
(1) Of the $600 million U.S. Notes (2023) that were redeemed in January 2020, in the table above $185 million is included in 2020 (reflecting the amount
repaid with cash on hand), $105 million is included in 2021 (reflecting the amount repaid using borrowings under the receivables securitization facility),
and $310 million is included in 2024 (reflecting the amount repaid using borrowings under the revolving credit facility).
(2) The total debt amounts presented above exclude debt issuance costs totaling $30 million as of December 31, 2019.
Senior Secured Credit Agreement
93
On November 20, 2018, LKQ Corporation, LKQ Delaware LLP, and certain other subsidiaries (collectively, the "Borrowers") entered into Amendment
No. 3 to the Fourth Amended and Restated Credit Agreement ("Credit Agreement"), which amended the Fourth Amended and Restated Credit Agreement dated
January 29, 2016 by modifying certain terms to (1) increase the total availability under the revolving credit facility's multicurrency component from $2.75 billion
to $3.15 billion; (2) reduce the margin on borrowings by 25 basis points at the September 30, 2018 leverage ratio, and reduce the number of leverage pricing tiers;
(3) extend the maturity date by one year to January 29, 2024; (4) reduce the unused facility fee depending on leverage category; (5) increase the capacity for
incurring additional indebtedness under our receivables securitization facility; (6) increase the maximum borrowing limit of swingline loans and add the ability to
borrow in British Pounds and Euros; and (7) make other immaterial or clarifying modifications and amendments to the terms of the Credit Agreement. Borrowings
will continue to bear interest at variable rates.
Amounts under the revolving credit facility are due and payable upon maturity of the Credit Agreement on January 29, 2024. Term loan borrowings,
which totaled $341 million as of December 31, 2019, are due and payable in quarterly installments equal to approximately $4 million on the last day of each fiscal
quarter, with the remaining balance due and payable on January 29, 2024. The increase in the revolving credit facility's multicurrency component of $400 million
was used in part to pay down $240 million of the term loan (to the new $350 million amount that was outstanding as of the date of the amendment); the remainder
was used for general corporate purposes.
We are required to prepay the term loan by amounts equal to proceeds from the sale or disposition of certain assets if the proceeds are not reinvested
within twelve months. We also have the option to prepay outstanding amounts under the Credit Agreement without penalty.
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.
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 our 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. Including the effect of the interest rate swap agreements described in
Note 11, "Derivative Instruments and Hedging Activities," the weighted average interest rates on borrowings outstanding under the Credit Agreement at
December 31, 2019 and 2018 were 1.6% and 1.9%, respectively. 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.
Of the total borrowings outstanding under the Credit Agreement, there were $18 million classified as current maturities at December 31, 2019 compared
to $9 million at December 31, 2018. As of December 31, 2019, 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 December 31, 2019 was $1.8 billion.
Related to the execution of Amendment No. 3 to the Fourth Amended and Restated Credit Agreement in November 2018, we incurred $4 million of fees,
the majority of which were capitalized as an offset to Long-Term Obligations and are amortized over the term of the agreement. The amounts recorded as a loss on
debt extinguishment in the Consolidated Statements of Income for the years ended December 31, 2018 and 2017 were primarily related to the write-off of
capitalized debt issuance costs related to various amendments to our Fourth Amended and Restated Credit Agreement.
U.S. Notes (2023)
In 2013, we issued $600 million aggregate principal amount of 4.75% senior notes due 2023 (the "U.S. Notes (2023)"). The U.S. Notes (2023) were
governed by the Indenture dated as of May 9, 2013 (the "U.S. Notes (2023) Indenture") among LKQ Corporation, certain of our subsidiaries (the "Guarantors"),
the trustee, paying agent, transfer agent and registrar. The U.S. Notes (2023) were registered under the Securities Act of 1933.
The U.S. Notes (2023) bore interest at a rate of 4.75% per year from the most recent payment date on which interest had been paid or provided for.
Interest on the U.S. Notes (2023) was payable in arrears on May 15 and November 15 of each year. The U.S. Notes (2023) were fully and unconditionally
guaranteed, jointly and severally, by the Guarantors.
The U.S. Notes (2023) and the related guarantees were, respectively, LKQ Corporation's and each Guarantor's senior unsecured obligations and were
subordinated to all of the Guarantors' existing and future secured debt to the extent of the assets
94
securing that secured debt. In addition, the U.S. Notes (2023) were effectively subordinated to all of the liabilities of our subsidiaries that were not guaranteeing the
U.S. Notes (2023) to the extent of the assets of those subsidiaries.
On January 10, 2020, we redeemed the U.S Notes (2023) at a redemption price equal to 101.583% of the principal amount of the U.S. Notes (2023) plus
accrued and unpaid interest thereon to, but not including, January 10, 2020. The total redemption payment was $614 million, including an early-redemption
premium of $9 million and accrued and unpaid interest of $4 million. In the first quarter of 2020, we will record a loss on debt extinguishment of $13 million
related to the redemption due to the early-redemption premium and the write-off of the unamortized debt issuance costs.
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.
The Euro Notes (2024) bear interest at a rate of 3.875% per year from the date of original issuance or from the most recent payment date on which interest
has been paid or provided for. 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.
Euro Notes (2026/28)
On April 9, 2018, LKQ European Holdings B.V. ("LKQ Euro Holdings"), a wholly-owned subsidiary of LKQ Corporation, completed an offering of €1.0
billion aggregate principal amount of senior notes. The offering consisted of €750 million senior notes due 2026 (the "2026 notes") and €250 million senior notes
due 2028 (the "2028 notes" and, together with the 2026 notes, 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 or will be used to
(i) 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.
The 2026 notes and 2028 notes bear interest at a rate of 3.625% and 4.125%, respectively, per year from the date of original issuance or from the most
recent payment date on which interest has been paid or provided for. Interest on the Euro Notes (2026/28) is payable in arrears on April 1 and October 1 of each
year. The Euro Notes (2026/28) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2026/28) Subsidiaries (the "Euro Notes
(2026/28) Guarantors").
The Euro Notes (2026/28) and the related guarantees are, respectively, LKQ Euro Holdings' and each Euro Notes (2026/28) Guarantor’s senior unsecured
obligations and will be subordinated to all of LKQ Euro Holdings' and the Euro Notes
95
(2026/28) Guarantors’ existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2026/28) are effectively
subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2026/28) to the extent of the assets of those subsidiaries. The Euro
Notes (2026/28) have been listed on the Global Exchange Market of Euronext Dublin.
The Euro Notes (2026/28) 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, 2021, we may redeem some or all of the 2026 notes at the
applicable redemption prices set forth in the Euro Notes (2026/28) Indenture. On or after April 1, 2023, we may redeem some or all of the 2028 notes at the
applicable redemption prices set forth in the Euro Notes (2026/28) Indenture. We also may redeem up to 35% of the 2026 notes and up to 35% of the 2028 notes
before April 1, 2021 with the net cash proceeds from certain equity offerings. We may be required to make an offer to purchase the Euro Notes (2026/28) 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 (2026/28) 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.
Related to the execution of the Euro Notes (2026/28) in April 2018, we incurred $16 million of fees, which were capitalized as an offset to Long-Term
Obligations and are amortized over the term of the Euro Notes (2026/28).
Restricted Payments
Our senior secured credit agreement and our senior notes indentures contain limitations on payment of cash dividends or other distributions of assets.
Based on limitations in effect under our senior secured credit agreement and senior notes indentures, the maximum amount of dividends we could pay as of
December 31, 2019 was approximately $1.9 billion. The limit on the payment of dividends is calculated using historical financial information and will change from
period to period.
Receivables Securitization Facility
On December 20, 2018, we amended the terms of our receivables securitization facility with MUFG to: (i) extend the term of the facility to November 8,
2021; (ii) increase the maximum amount available to $110 million; and (iii) make other clarifying and updating changes. Under the facility, LKQ sells an
ownership interest in certain receivables, related collections and security interests to MUFG for the benefit of conduit investors and/or financial institutions for
cash proceeds. Upon payment of the receivables by customers, rather than remitting to MUFG the amounts collected, LKQ retains such collections as proceeds for
the sale of new receivables generated by certain of the ongoing operations of the Company.
The sale of the ownership interest in the receivables is accounted for as a secured borrowing on our Consolidated Balance Sheets, under which the
receivables included in the program collateralize the amounts invested by MUFG, the conduit investors and/or financial institutions (the "Purchasers"). The
receivables are held by LKQ Receivables Finance Company, LLC ("LRFC"), a wholly owned bankruptcy-remote special purpose subsidiary of LKQ, and
therefore, the receivables are available first to satisfy the creditors of LRFC, including the Purchasers. While there were no borrowings on our receivables
securitization facility as of December 31, 2019, $132 million of net receivables were available as collateral for the investment under the receivables facility as of
December 31, 2019; there were also $132 million of net receivables available as collateral as of December 31, 2018.
Under the receivables facility, we pay variable interest rates plus a margin on the outstanding amounts invested by the Purchasers. The variable rates are
based on (i) commercial paper rates, (ii) LIBOR, or (iii) base rates, and are payable monthly in arrears. The commercial paper rate is the applicable variable rate
unless conduit investors are not available to invest in the receivables at commercial paper rates. In such case, financial institutions will invest at the LIBOR rate or
at base rates. We also pay a commitment fee on the excess of the investment maximum over the average daily outstanding investment, payable monthly in arrears.
The outstanding balance was $110 million as of December 31, 2018, and there was no outstanding balance as of December 31, 2019. At December 31, 2018, we
classified the outstanding balance as long-term on the Consolidated Balance Sheets because we have the ability and intent to refinance these borrowings on a long-
term basis.
Note 11. Derivative Instruments and Hedging Activities
We are exposed to market risks, including the effect of changes in interest rates, foreign currency exchange rates and commodity prices. Under our
current policies, we use derivatives to manage our exposure to variable interest rates on our senior secured debt and changing foreign exchange rates for certain
foreign currency denominated transactions. We do not hold or issue derivatives for trading purposes.
96
Cash Flow Hedges
We hold interest rate swap agreements to hedge a portion of the variable interest rate risk on our variable rate borrowings under our Credit Agreement,
with the objective of minimizing the impact of interest rate fluctuations and stabilizing cash flows. Under the terms of the interest rate swap agreements, we pay
the fixed interest rate and receive payment at a variable rate of interest based on LIBOR for the respective currency of each interest rate swap agreement’s notional
amount. Changes in the fair value of the interest rate swap agreements are recorded in Accumulated Other Comprehensive Income (Loss) and are reclassified to
Interest expense when the underlying interest payment has an impact on earnings. Our interest rate swap contracts have maturity dates ranging from January to
June 2021. In December 2018, we sold two interest rate swap contracts with a notional amount of $110 million.
From time to time, we may hold foreign currency forward contracts related to certain foreign currency denominated intercompany transactions, with the
objective of minimizing the impact of fluctuating exchange rates on these future cash flows. Under the terms of the foreign currency forward contracts, we will sell
the foreign currency in exchange for U.S. dollars at a fixed rate on the maturity dates of the contracts. Changes in the fair value of the foreign currency forward
contracts are recorded in Accumulated Other Comprehensive Income (Loss) and reclassified to Interest income and other income, net when the underlying
transaction has an impact on earnings.
We hold cross currency swaps, which contain an interest rate swap component and a foreign currency forward contract component that, combined with
related intercompany financing arrangements, effectively convert variable rate U.S. dollar-denominated borrowings into fixed rate euro-denominated borrowings.
The swaps are intended to minimize the impact of fluctuating exchange rates and interest rates on the cash flows resulting from the related intercompany financing
arrangements. Changes in the fair value of the derivative instruments are recorded in Accumulated Other Comprehensive Income (Loss) and are reclassified to
Interest expense and Interest income and other income, net when the underlying transactions have an impact on earnings. For certain of the swaps, the notional
amount steps down by €4 million quarterly, with the balance maturing at the end of the contract. Our cross currency swaps have maturity dates in October 2020
and January 2021. In October 2019, one of our cross currency swaps matured with a notional amount of $92 million (€80 million).
The activity related to our cash flow hedges is presented in operating activities in our Consolidated Statements of Cash Flows.
The following tables summarize the notional amounts and fair values of our designated cash flow hedges as of December 31, 2019 and 2018 (in
thousands):
Notional Amount
Fair Value at December 31, 2019 (USD)
December 31, 2019
Other Current
Assets
Other Noncurrent
Assets
Other Accrued
Expenses
Other
Noncurrent
Liabilities
Interest rate swap agreements
USD denominated
Cross currency swap agreements
USD/euro
Total cash flow hedges
$
$
480,000 $
— $
3,262 $
— $
—
466,621
$
2,975
2,975 $
181
3,443 $
970
970 $
23,349
23,349
Notional Amount
Fair Value at December 31, 2018 (USD)
December 31, 2018
Other Current
Assets
Other
Noncurrent
Assets
Other Accrued
Expenses
Other
Noncurrent
Liabilities
Interest rate swap agreements
USD denominated
Cross currency swap agreements
USD/euro
Total cash flow hedges
$
$
480,000 $
— $
14,967 $
— $
—
574,315
$
211
211 $
7,669
22,636 $
127
127 $
40,870
40,870
While certain derivative instruments executed with the same counterparty are subject to master netting arrangements, we present our cash flow hedge
derivative instruments on a gross basis on our Consolidated Balance Sheets. The impact of netting the fair values of these contracts would result in a decrease to
Prepaid expenses and other current assets and Other
97
accrued expenses on our Consolidated Balance Sheets of $1 million at December 31, 2019. The impact of netting the fair values of these contracts would result in a
decrease to Other noncurrent assets and Other noncurrent liabilities on our Consolidated Balance Sheets of $1 million and $14 million at December 31, 2019 and
2018, respectively.
The activity related to our cash flow hedges is included in Note 9, "Accumulated Other Comprehensive Income (Loss)." As of December 31, 2019, we
estimate that we will reclassify $12 million of derivative gains (net of tax) from Accumulated Other Comprehensive Income (Loss) to Interest expense in our
Consolidated Statements of Income within the next 12 months. We estimate that we will also reclassify $8 million of derivative losses (net of tax) from
Accumulated Other Comprehensive Income (Loss) to Interest income and other income, net in our Consolidated Statements of Income within the next 12 months;
the reclassification of derivative losses to Interest income and other income, net offsets the projected impact of the remeasurement of the underlying transactions.
Other Derivative Instruments
We hold other short-term derivative instruments, including foreign currency forward contracts, to manage our exposure to variability related to inventory
purchases denominated in a non-functional currency. We have elected not to apply hedge accounting for these transactions, and therefore the contracts are adjusted
to fair value through our results of operations as of each balance sheet date, which could result in volatility in our earnings. The notional amount and fair value of
these contracts at December 31, 2019 and 2018, along with the effect on our results of operations in 2019, 2018 and 2017, were immaterial.
Note 12. 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 year ended December 31, 2019,
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 assets and 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 December 31, 2019 and December 31, 2018 (in thousands):
Assets:
Cash surrender value of life insurance
Interest rate swaps
Cross currency swap agreements
Total Assets
Liabilities:
Contingent consideration liabilities
Deferred compensation liabilities
Cross currency swap agreements
Total Liabilities
Balance as of
December 31, 2019
Fair Value Measurements as of December 31, 2019
Level 1
Level 2
Level 3
$
$
$
$
60,637 $
3,262
3,156
67,055 $
11,539 $
63,981
24,319
99,839 $
98
— $
—
—
— $
— $
—
—
— $
60,637 $
3,262
3,156
67,055 $
—
—
—
—
— $
11,539
63,981
24,319
—
—
88,300 $
11,539
Assets:
Cash surrender value of life insurance
Interest rate swaps
Cross currency swap agreements
Total Assets
Liabilities:
Contingent consideration liabilities
Deferred compensation liabilities
Cross currency swap agreements
Total Liabilities
Balance as of
December 31, 2018
Fair Value Measurements as of December 31, 2018
Level 1
Level 2
Level 3
$
$
$
$
47,649 $
14,967
7,880
70,496 $
5,209 $
48,984
40,997
95,190 $
— $
—
—
— $
— $
—
—
— $
47,649 $
14,967
7,880
70,496 $
— $
48,984
40,997
89,981 $
—
—
—
—
5,209
—
—
5,209
The cash surrender value of life insurance is included in Other noncurrent assets on our Consolidated Balance Sheets. The current portion of deferred
compensation is included in Accrued payroll-related liabilities and the current portion of contingent consideration liabilities is included in Other current liabilities
on our Consolidated Balance Sheets; the noncurrent portion of these amounts is included in Other noncurrent liabilities on our Consolidated Balance Sheets based
on the expected timing of the related payments. The balance sheet classification of the interest rate swaps and cross currency swap agreements is presented in Note
11, "Derivative Instruments and Hedging Activities."
Our Level 2 assets and liabilities are valued using inputs from third parties and market observable data. We obtain valuation data for the cash surrender
value of life insurance and deferred compensation liabilities from third party sources, which determine the net asset values for our accounts using quoted market
prices, investment allocations and reportable trades. We value our other derivative instruments using a third party valuation model that performs a discounted cash
flow analysis based on the terms of the contracts and market observable inputs such as current and forward interest rates and current and forward foreign exchange
rates.
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.
Financial Assets and Liabilities Not Measured at Fair Value
Our debt is reflected on the Consolidated Balance Sheets at cost. Based on market conditions as of December 31, 2019 and 2018, the fair value of our
credit agreement borrowings reasonably approximated the carrying values of $1.6 billion and $1.7 billion, respectively. In addition, based on market conditions,
the fair value of the outstanding borrowings under the receivables facility reasonably approximated the carrying value of $110 million at December 31, 2018; as of
December 31, 2019, there were no outstanding borrowings under the receivables facility. As of December 31, 2019 and December 31, 2018, the fair values of the
U.S. Notes (2023) were approximately $609 million and $574 million, respectively, compared to a carrying value of $600 million at each date. As of December 31,
2019 and December 31, 2018, the fair values of the Euro Notes (2024) were approximately $632 million and $586 million compared to carrying values of $561
million and $573 million, respectively. As of December 31, 2019, the fair value of the Euro Notes (2026/28) was $1.2 billion compared to a carrying value of $1.1
billion; as of December 31, 2018, the fair value of the Euro Notes (2026/28) approximated the carrying value of $1.1 billion.
The fair value measurements of the borrowings under our credit agreement and receivables facility are classified as Level 2 within the fair value hierarchy
since they are determined based upon significant inputs observable in the market, including interest rates on recent financing transactions with similar terms and
maturities. We estimated the fair value by calculating the upfront cash payment a market participant would require at December 31, 2019 to assume these
obligations. The fair value of our U.S. Notes (2023) is classified as Level 1 within the fair value hierarchy since it is determined based upon observable market
inputs including quoted market prices in an active market. The fair values of our Euro Notes (2024) and Euro Notes (2026/28) 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.
99
Note 13. Leases
We lease certain warehouses, distribution centers, retail stores, office space, land, vehicles and equipment. We determine if an arrangement is a lease at
inception. Operating lease right-of-use ("ROU") assets and operating lease liabilities are recognized based on the present value of the future minimum lease
payments over the lease term at the commencement date. As the implicit rate for most of our leases is not readily determinable, we use our incremental borrowing
rate based on the information available at commencement date in determining the present value of future payments. Upon adoption of the new lease standard, we
utilized our incremental borrowing rate as of the date of adoption. We determine our incremental borrowing rate by analyzing yield curves with consideration of
lease term, and country and company specific factors. The operating lease ROU asset also includes any lease prepayments and excludes lease incentives.
Many of our leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 40 years or more. For each lease,
we consider whether we are reasonably certain to exercise these options to extend. Other contracts may contain termination options that we assess to determine
whether we are reasonably certain not to exercise those options. Certain leases also include options to purchase the leased property. The depreciable life of assets
and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Some of our lease agreements include rental payments adjusted periodically for inflation. Most of these adjustments are considered variable lease costs.
Other variable lease costs consist of certain non-lease components that are disclosed as lease costs due to our election of the practical expedient to combine lease
and non-lease components and include items such as variable payments for utilities, property taxes, common area maintenance, sales taxes, and insurance.
For leases with an initial term of 12 months or less, we have not recognized an operating lease ROU asset or operating lease liability on the Consolidated
Balance Sheets; we recognize lease expense for these leases on a straight-line basis over the lease terms.
We guarantee the residual values for the majority of our vehicles. The residual values decline over the lease terms to a defined percentage of original cost.
In the event the lessor does not realize the residual value when a vehicle is sold, we would be responsible for a portion of the shortfall. Similarly, if the lessor
realizes more than the residual value when a vehicle is sold, we would be paid the amount realized over the residual value. Had we terminated all of our operating
leases subject to these guarantees at December 31, 2019, our portion of the guaranteed residual value would have totaled approximately $67 million. Other than the
residual value guarantees associated with our vehicles discussed above, we do not have any other material residual value guarantees or restrictive covenants.
The amounts recorded on the Consolidated Balance Sheet as of December 31, 2019 related to our lease agreements are as follows (in thousands):
Leases
Classification
December 31, 2019
Assets
Operating lease assets, net
Finance lease assets, net
Total leased assets
Liabilities
Current
Operating
Finance
Noncurrent
Operating
Finance
Total lease liabilities
Operating lease assets, net
Property, plant and equipment, net
Current portion of operating lease liabilities
Current portion of long-term obligations
Long-term operating lease liabilities, excluding current portion
Long-term obligations, excluding current portion
$
$
$
$
1,308,511
39,077
1,347,588
221,527
9,409
1,137,597
31,428
1,399,961
The components of lease expense are as follows (in thousands):
100
Lease Cost
Classification
Year Ended
December 31, 2019
Operating lease cost
Operating lease cost
Short-term lease cost
Variable lease cost
Finance lease cost
Cost of goods sold
Selling, general and administrative expenses
Selling, general and administrative expenses
Selling, general and administrative expenses
Amortization of leased assets
Depreciation and amortization
Interest on lease liabilities
Interest expense
Sublease income
Net lease cost
Selling, general and administrative expenses
$
$
13,416
303,619
9,392
95,899
10,277
1,546
(1,640)
432,509
The future minimum lease commitments under our noncancelable operating leases at December 31, 2018 were as follows (in thousands):
Years ending December 31:
2019
2020
2021
2022
2023
Thereafter
Future Minimum Lease Payments
$
294,269
256,172
210,632
158,763
131,518
777,165
$
1,828,519
The future minimum lease commitments under our leases at December 31, 2019 are as follows (in thousands):
Years ending December 31:
2020
2021
2022
2023
2024
Thereafter
Future minimum lease payments
Less: Interest
Present value of lease liabilities
Operating leases
Finance leases (1)
Total
$
288,726 $
10,121 $
249,168
200,546
167,858
138,502
760,030
1,804,830
445,706
8,743
7,166
3,591
3,138
19,381
52,140
11,303
$
1,359,124 $
40,837 $
298,847
257,911
207,712
171,449
141,640
779,411
1,856,970
457,009
1,399,961
(1) Amounts are included in the scheduled maturities of long-term obligations in "Note 10, "Long-Term Obligations" and in the “Liquidity and Capital
Resources” section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of this Annual Report on
Form 10-K.
As of December 31, 2019, we have additional minimum operating lease payments for leases that have not yet commenced of $144 million. These
operating leases will commence in the next 18 months with lease terms of 1 to 25 years. Most of these leases have not commenced as the assets are in the process
of being constructed. The amount includes payments expected to be made under the Benelux region central distribution center lease commencing in early 2021
after construction is completed. The lease has a term of 15 years with two renewal options of 5 years each.
Other information related to leases was as follows:
101
Lease Term and Discount Rate
December 31, 2019
Weighted-average remaining lease term (years)
Operating leases
Finance leases
Weighted-average discount rate
Operating leases
Finance leases
Supplemental cash flows information (in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash outflows from operating leases
Financing cash outflows from finance leases
Leased assets obtained in exchange for new finance lease liabilities
Leased assets obtained in exchange for new operating lease liabilities
9.5
9.2
5.2%
4.1%
Year Ended
December 31, 2019
$
297,712
11,744
13,326
144,142
Note 14. Employee Benefit Plans
Defined 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.
On June 28, 2019, we approved an amendment to terminate our primary defined benefit plan in the U.S. (the "U.S. Plan") and freeze all related benefit
accruals, effective June 30, 2019. The distribution of the U.S. Plan assets pursuant to the termination will not be made until the plan termination satisfies all
regulatory requirements, which is expected to be completed in 2020. U.S. Plan participants will receive their full accrued benefits from plan assets by electing
either lump sum distributions or annuity contracts with a qualifying third party annuity provider. The resulting settlement effect of the U.S. Plan termination will be
determined based on prevailing market conditions, the lump sum offer participation rate of eligible participants, the actual lump sum distributions, and annuity
purchase rates at the date of distribution. As a result, we are currently unable to reasonably estimate either the timing or the final amount of such settlement
charges. Based on the valuation performed as of December 31, 2019, the U.S. Plan has an underfunded status of $8 million.
Funded Status
The table below summarizes the funded status of our defined benefit plans (in thousands):
102
Change in projected benefit obligation:
Projected benefit obligation - beginning of year
Acquisitions (1)
Service cost
Interest cost
Participant contributions
Actuarial (gain) / loss
Benefits paid (2)
Curtailment
Settlement (3)
Currency impact
Projected benefit obligation - end of year
Change in fair value of plan assets:
Fair value - beginning of year
Acquisitions (1)
Actual return on plan assets
Employer contributions
Participant contributions
Benefits paid
Settlement (3)
Currency impact
Fair value - end of year
Funded status at end of year (liability)
Accumulated benefit obligation
December 31,
2019
2018
201,492 $
2,071
3,592
4,077
408
32,018
(6,849)
(6)
(8,493)
(2,922)
126,031
79,211
3,215
3,476
415
(989)
(4,447)
—
(756)
(4,664)
225,388 $
201,492
91,672 $
—
2,558
4,740
408
(6,770)
(8,493)
(810)
83,305 $
(142,083) $
82,852
251
3,018
9,975
415
(2,788)
—
(2,051)
91,672
(109,820)
222,607 $
199,337
$
$
$
$
$
$
(1) 2018 amounts relate primarily to the addition of plans in connection with our acquisition of Stahlgruber.
(2)
Includes amounts paid from plan assets as well as amounts paid from Company assets.
(3) During 2019, settlement accounting was triggered for three of our European pension plans resulting in a net gain of less than $1 million recognized in
Interest income and other income, net in our Consolidated Statements of Income.
The net amounts recognized for defined benefit plans in the Consolidated Balance Sheets were as follows (in thousands):
Non-current assets
Current liabilities
Non-current liabilities
December 31,
2019
2018
$
$
— $
(11,754)
(130,329)
(142,083) $
377
(3,280)
(106,917)
(109,820)
The following table summarizes the accumulated benefit obligation and aggregate fair value of plan assets for pension plans with accumulated benefit
obligations in excess of plan assets (in thousands):
103
Accumulated benefit obligation
$
Aggregate fair value of plan assets
222,607 $
83,305
169,097
60,988
December 31,
2019
2018
The following table summarizes the projected benefit obligation and aggregate fair value of plan assets for pension plans with projected benefit
obligations in excess of plan assets (in thousands):
Projected benefit obligation
$
Aggregate fair value of plan assets
225,388 $
83,305
171,185
60,988
December 31,
2019
2018
The table below summarizes the weighted-average assumptions used to calculate the year-end benefit obligations:
Discount rate used to determine benefit obligation
Rate of future compensation increase
2019
2018
1.4%
1.7%
2.1%
0.9%
Net Periodic Benefit Cost
The table below summarizes the components of net periodic benefit cost for our defined benefit plans (in thousands):
Service cost
Interest cost
Expected return on plan assets (1)
Amortization of prior service credit
Amortization of actuarial (gain) loss (2)
Curtailment gain
Settlement (gain) / loss
Net periodic benefit cost
Year Ended
December 31,
2018
2017
2019
$
$
3,592 $
4,077
(2,337)
—
(404)
—
(378)
3,215 $
3,476
(2,949)
—
(54)
—
74
4,550 $
3,762 $
4,525
3,670
(2,467)
(181)
473
(3,811)
(4)
2,205
(1) We use the fair value of our plan assets to calculate the expected return on plan assets.
(2) Actuarial gains and losses are amortized using a corridor approach. Gains and losses are amortized if, as of the beginning of the year, the cumulative net
gain or loss exceeds 10 percent of the greater of the projected benefit obligation or the fair value of the plan assets. Gains and losses in excess of the
corridor are amortized over the average remaining service period of active members expected to receive benefits under the plan or, in the case of closed
plans, the expected future lifetime of the employees participating in the plan.
For the years ended December 31, 2019, 2018 and 2017, the service cost component of net periodic benefit cost was classified in Selling, general and
administrative expenses, while the other components of net periodic benefit cost were classified in Interest income and other income, net in our Consolidated
Statements of Income.
The table below summarizes the weighted-average assumptions used to calculate the net periodic benefit cost in the table above:
Discount rate used to determine service cost
Discount rate used to determine interest cost
Rate of future compensation increase
Expected long-term return on plan assets (1)
2019
2018
2017
1.3%
2.5%
1.8%
3.1%
1.3%
2.5%
1.9%
4.8%
1.5%
3.0%
1.3%
5.0%
104
(1) Our expected long-term return on plan assets is determined based on our asset allocation and estimate of future long-term returns by asset class.
Assumed mortality is also a key assumption in determining benefit obligations and net periodic benefit cost. In some of our European plans, a price
inflation index is also an assumption in determining benefit obligations and net periodic benefit cost.
As of December 31, 2019, the pre-tax amounts recognized in Accumulated other comprehensive income consisted of $42 million of net actuarial losses
for our defined benefit plans that have not yet been recognized in net periodic benefit cost. Of this amount, we expect $1 million to be recognized as a component
of net periodic benefit cost during the year ending December 31, 2020.
Fair Value of Plan Assets
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market
participants. 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 in which
little or no market data exists, therefore requiring an entity to develop its own assumptions. Investments that are valued using net asset value ("NAV") (or its
equivalent) as a practical expedient are excluded from the fair value hierarchy disclosure.
The following is a description of the valuation methodologies used for assets reported at fair value. The methodologies used at December 31, 2019 and
December 31, 2018 are the same.
Level 1 investments: Cash and cash equivalents are valued based on cost, which approximates fair value. Short-term investments are valued initially at
cost and adjusted for amortization of any discount or premium. U.S. Bond funds are priced by industry vendors such as Intercontinental Exchange (ICE) Data
Services using benchmark yields, reported trades, issuer spreads, and broker/dealer quotes.
Level 3 investments: Investments in insurance contracts represent the cash surrender value of the insurance policy. These are actuarially determined
amounts based on projections of future benefit payments, discount rates, and expected long-term rate of return on assets.
The remaining pension assets are valued at net asset value based on the underlying assets owned by the fund administrator, minus liabilities, divided by
the number of units outstanding and are included in the table below to reconcile the total investment fair value of our plan assets.
For our unfunded pension plans, the Company pays the defined benefit plan obligations when they become due. The table below summarizes the fair
value of our defined benefit plan assets by asset category within the fair value hierarchy for our funded defined benefit pension plans (in thousands):
Cash and cash-equivalents (1)
$
— $
— $
— $
— $
— $
30,684 $
— $
— $
Level 1
Level 2
Level 3
NAV
Total
Level 1
Level 2
Level 3
2019
2018
December 31,
Short-term investments
U.S. Bonds (2)
Insurance contracts
Mutual fund (3)
433
29,035
—
—
—
—
—
—
—
—
40,676
—
—
—
433
29,035
40,676
—
—
—
—
—
—
—
13,161
13,161 $
— $
— $
—
—
Total investments at fair value
$ 29,468 $
— $ 40,676 $
13,161 $ 83,305 $
30,684 $
— $
60,988 $
91,672
(1) Consists of institutional short-term investment funds.
(2) Consists primarily of U.S. Treasury notes with readily available pricing data.
(3) The underlying assets of the mutual fund valued at NAV consist of international bonds, equity, real estate and other investments.
The following table summarizes the changes in fair value measurements of Level 3 investments for our defined benefit plans (in thousands):
105
Total
30,684
—
—
—
—
60,988
60,988
Balance at beginning of year
Actual return on plan assets:
Relating to assets held at the reporting date
Purchases, sales and settlements
Transfers in and/or out of Level 3
Currency impact
Balance at end of year
December 31,
2019
2018
60,988 $
60,774
1,424
(1,181)
(19,640)
(915)
40,676 $
2,556
(541)
255
(2,056)
60,988
$
$
Assets for our defined benefit pension plans in Europe are invested primarily in insurance policies. Under these contracts, we pay premiums to the
insurance company, which are based on an internal actuarial analysis performed by the insurance company; the insurance company then funds the pension
payments to the plan participants upon retirement. In 2019, we changed our funding for one of our European plans from insurance contracts to a direct investment
in a mutual fund which is invested in various international bond, equity, real estate and other investments. The assets for our U.S. plan are managed by a master
trust, with oversight responsibility by our Benefits Committee. During 2019, we engaged an investment advisor to help minimize the volatility in our funded status
as we began the process of terminating our U.S. Plan. As a result, we updated our investment strategy such that as of December 31, 2019 our U.S. Plan assets
reside primarily in U.S. Bonds, with a smaller allocation of assets in short-term investments. The new investment policy and allocation of the assets was approved
by our Benefits Committee.
Employer Contributions and Estimated Future Benefit Payments
During the year ended December 31, 2019, we contributed $5 million to our pension plans. We estimate that contributions to our pension plans during
2020 will be $13 million.
The following table summarizes estimated future benefit payments as of December 31, 2019 (in thousands):
Year Ended December 31,
Amount
$
2020 (1)
2021
2022
2023
2024
2025 - 2029
43,446
4,357
4,890
5,003
5,474
29,946
(1) This amount includes the gross benefit payments expected to be paid to settle the U.S. Plan, exclusive of plan assets.
106
Note 15. Income Taxes
The provision for income taxes consists of the following components (in thousands):
Current:
Federal
State
Foreign
Total current provision for income taxes
Deferred:
Federal
State
Foreign
Total deferred provision (benefit) for income taxes
Provision for income taxes
Year Ended December 31,
2019
2018
2017
$
$
$
$
$
101,839 $
90,216 $
24,925
81,081
25,851
77,508
207,845 $
193,575 $
22,173 $
14,977 $
6,376
(21,064)
7,485 $
215,330 $
4,386
(21,543)
(2,180) $
191,395 $
196,825
27,149
58,123
282,097
(37,486)
4,044
(13,095)
(46,537)
235,560
Income taxes have been based on the following components of income from continuing operations before provision for income taxes (in thousands):
Domestic
Foreign
Income from continuing operations before provision for income taxes
The U.S. federal statutory rate is reconciled to the effective tax rate as follows:
U.S. federal statutory rate
U.S. federal tax reform - federal deferred tax rate change
U.S. federal tax reform - transition tax on foreign earnings
State income taxes, net of state credits and federal tax impact
Impact of rates on international operations
Excess tax benefits from stock-based compensation
Non-deductible expenses
Other, net
Effective tax rate
Year Ended December 31,
2019
2018
2017
$
$
616,842 $
174,180
791,022 $
562,758 $
180,673
743,431 $
575,148
191,479
766,627
Year Ended December 31,
2019
2018
2017
21.0 %
— %
0.1 %
3.2 %
1.4 %
(0.3)%
0.9 %
0.9 %
27.2 %
21.0 %
— %
(1.3)%
3.5 %
0.9 %
(0.6)%
1.6 %
0.6 %
25.7 %
35.0 %
(9.5)%
6.6 %
2.8 %
(3.2)%
(1.0)%
1.1 %
(1.1)%
30.7 %
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act introduced broad and complex changes to U.S. income tax laws that
impact us, most notably a reduction of the U.S. statutory corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. Additionally,
beginning in 2018 the Tax Act imposed a regime of taxation on foreign subsidiary earnings, GILTI, and on certain related party payments, BEAT. As part of the
transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, the Tax Act imposed a one-time transition tax on the
deemed repatriation of historical earnings of foreign subsidiaries as of December 31, 2017.
On December 22, 2017, the U.S. Securities and Exchange Commission Staff issued SAB 118, which provided guidance on accounting for the tax effects of the
Tax Act. SAB 118 provided a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the
accounting required under ASC 740, Income Taxes. In accordance with SAB 118, a company was required to reflect the income tax effects of those aspects of the
Tax Act for which the accounting under ASC 740 was complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act was
incomplete but the company was able to determine a reasonable estimate, it was required to record a provisional estimate in the financial statements.
107
Transition Tax on Foreign Earnings: In the fourth quarter of 2017, we recognized a provisional income tax expense of $51 million related to the one-time
transition tax on foreign earnings. During the third quarter of 2018, we recorded a $10 million favorable adjustment to the provisional amount. As of December 31,
2018, we substantially completed our analysis of the transition tax, and the liability was no longer considered provisional. In the third quarter of 2019, we amended
our 2017 transition tax calculation and recorded an additional expense of $1 million. As permitted by the Tax Act, we elected to pay the final $42 million liability
in installments over 8 years. This liability has been reduced by the first two installments and other payment credits to $33 million and is recorded in Other
noncurrent liabilities on our Consolidated Balance Sheets.
Revaluation of Deferred Tax Assets and Liabilities: As a result of the Tax Act reduction in the U.S. federal statutory rate from 35% to 21%, at December
31, 2017, we recorded a provisional decrease to net deferred tax liabilities and a corresponding provisional U.S. federal deferred tax benefit of $73 million. There
were no subsequent adjustments recognized with regard to the revaluation of deferred taxes, and the accounting for this impact of the Tax Act is complete.
GILTI: While the Tax Act provides for a modified territorial tax system, under a highly complex provision commonly known as GILTI, the Tax Act
subjects a U.S. shareholder to current tax on certain earnings of foreign subsidiaries, subject to relief for available foreign tax credits. The FASB Staff Q&A, Topic
740, No. 5, "Accounting for GILTI," provides that an accounting policy election can be made either to recognize deferred taxes for temporary basis differences
expected to reverse as GILTI in future years, or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We have
elected to account for GILTI in the year the tax is incurred. For the years ended December 31, 2019 and 2018, the impact of GILTI increased our effective tax rate
by approximately 0.6% and 0.3%, respectively.
Indefinite Reinvestment Assertion: Undistributed earnings of our foreign subsidiaries amounted to approximately $743 million at December 31, 2019.
Through December 31, 2017, it was our practice and intention to permanently reinvest the undistributed earnings of our foreign subsidiaries, and no U.S. deferred
income taxes or foreign withholding taxes were recorded. Beginning in 2018, the Tax Act generally provided a 100% participation exemption from further U.S.
taxation of dividends received from 10-percent or more owned foreign corporations held by U.S. corporate shareholders. Although future dividend income is
exempt from U.S. federal tax in the hands of the U.S. corporate shareholders, either as a result of the participation exemption, or due to the previous taxation of
such earnings under the transition tax and GILTI regime, companies must still apply the guidance of ASC 740 to account for the tax consequences of outside basis
differences and other tax impacts of their investments in non-U.S. subsidiaries. Further, the 2017 transition tax reduced a majority of the previous outside basis
differences in our foreign subsidiaries, and most of any new differences arising have extensive interaction with the GILTI regime discussed above.
Based on a review of our global financing and capital expenditure requirements as of December 31, 2019, we have made no changes to our assertion that
we plan to permanently reinvest the undistributed earnings of our international subsidiaries. Thus, no deferred U.S. income taxes or potential foreign withholding
taxes have been recorded. Due to the complexity of the new U.S. tax regime, it remains impractical to estimate the amount of deferred taxes potentially payable
were such earnings to be repatriated.
Although the SAB 118 measurement period has closed, further technical guidance related to the Tax Act, including final regulations on a broad range of
topics, is expected to be issued. In accordance with ASC 740, the Company will recognize any effects of the guidance in the period that such guidance is issued.
108
The significant components of our deferred tax assets and liabilities are as follows (in thousands):
December 31,
2019
2018
Deferred Tax Assets:
Accrued expenses and reserves
Qualified and nonqualified retirement plans
Inventory
Accounts receivable
Interest deduction carryforwards
Stock-based compensation
Operating lease assets, net
Net operating loss carryforwards
Other
Total deferred tax assets, gross
Less: valuation allowance
Total deferred tax assets
Deferred Tax Liabilities:
Goodwill and other intangible assets
Property, plant and equipment
Trade name
Operating lease liabilities
Other
Total deferred tax liabilities
Net deferred tax liability
Deferred tax assets and liabilities are reflected on our Consolidated Balance Sheets as follows (in thousands):
Noncurrent deferred tax assets
Noncurrent deferred tax liabilities
$
$
$
$
$
$
51,869 $
31,053
12,679
14,025
25,448
4,755
303,705
16,287
11,777
471,598
(41,815)
429,783 $
219,879 $
100,461
108,039
292,498
8,916
729,793 $
(300,010) $
60,337
20,525
15,474
16,208
20,392
4,859
—
13,222
12,370
163,387
(34,779)
128,608
216,699
87,839
116,615
—
15,511
436,664
(308,056)
December 31,
2019
2018
10,119 $
310,129
3,378
311,434
Noncurrent deferred tax assets and noncurrent deferred tax liabilities are included in Other noncurrent assets and Deferred income taxes, respectively, on
our Consolidated Balance Sheets.
We had net operating loss carryforwards, primarily for certain international tax jurisdictions, the tax benefits of which were $16 million and $13 million at
December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, we had tax credit carryforwards for certain U.S. state jurisdictions, the tax benefits of
which total less than $1 million and $1 million, respectively. As of December 31, 2019 and 2018, we had interest deduction carryforwards, primarily in Italy and
Germany, the tax benefits of which were $25 million and $20 million, respectively. As of December 31, 2019 and 2018, we had a U.S. capital loss carryforward,
the tax benefit of which was $5 million. As of December 31, 2019 and 2018, valuation allowances of $42 million and $35 million, respectively, were recorded for
deferred tax assets related to the Italy and Germany interest deduction carryforwards, the U.S. capital loss carryforward, and for certain foreign and U.S. net
operating loss carryforwards. The $7 million net increase in valuation allowances was primarily attributable to a $5 million valuation allowance provided on the
interest deduction carryforwards generated in 2019 due to thin capitalization constraints in Italy and Germany.
The net operating losses generally carry forward for an indefinite period. The interest deduction carryforwards in Italy and Germany do not expire. U.S.
capital losses carry forward for five years. Realization of these deferred tax assets is dependent on the generation of sufficient taxable income prior to the
expiration dates, where applicable, or in the case of interest carryforwards subject to legislative thin capitalization constraints, typically growth in EBITDA. Based
on historical and projected operating results, we believe that it is more likely than not that earnings will be sufficient to realize the deferred tax assets for which
valuation allowances have not been provided. While we expect to realize the deferred tax assets, net of valuation allowances, changes in tax laws or in estimates of
future taxable income may alter this expectation.
109
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
Balance at January 1
Additions for acquired tax positions
Additions based on tax positions related to the current year
Lapse of statutes of limitations
Cumulative translation adjustment
Balance at December 31
2019
2018
2017
1,237 $
1,376
50
(297)
(49)
1,690 $
—
5
(458)
—
2,317 $
1,237 $
2,146
73
5
(534)
—
1,690
$
$
Included in the balance of unrecognized tax benefits above as of December 31, 2019 are approximately $2 million, and as of December 31, 2018 and
2017, approximately $1 million, of tax benefits that, if recognized, would affect the effective tax rate. The balance of unrecognized tax benefits at December 31,
2019, 2018 and 2017 includes approximately $1 million of tax benefits that, if recognized, would result in adjustments to deferred taxes.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expense. Attributable to the unrecognized tax
benefits noted above, the Company had accumulated interest and penalties of less than $1 million at December 31, 2019, 2018 and 2017. During each of the years
ended December 31, 2019, 2018 and 2017, an immaterial amount of interest and penalties were recorded through the income tax provision, prior to any reversals
for lapses in the statutes of limitations.
During the twelve months beginning January 1, 2020, it is reasonably possible that we will reduce unrecognized tax benefits by less than $1 million, an
immaterial amount of which would impact our effective tax rate, primarily as a result of the expiration of certain statutes of limitations.
The company and/or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various U.S. state and international jurisdictions. With few
exceptions, the company is no longer subject to U.S. federal, state and local, or international income tax examinations by tax authorities for years before 2015.
Adjustments from examinations, if any, are not expected to have a material effect on our consolidated financial statements.
Note 16. Segment and Geographic Information
We have four operating segments: Wholesale – North America, Europe, Specialty and Self Service. Our Wholesale – North America and Self Service
operating segments are aggregated into one reportable segment, North America, because they possess similar economic characteristics and have common products
and services, customers, and methods of distribution. Our reportable segments are organized based on a combination of geographic areas served and type of
product lines offered. The reportable segments are managed separately as each business serves different customers (i.e. geographic in the case of North America
and Europe and product type in the case of Specialty) and is affected by different economic conditions. Therefore, we present three reportable segments: North
America, Europe and Specialty.
The following tables present our financial performance by reportable segment for the periods indicated (in thousands):
110
Year Ended December 31, 2019
Revenue:
Third Party
Intersegment
Total segment revenue
Segment EBITDA
Depreciation and amortization (1)
Year Ended December 31, 2018
Revenue:
Third Party
Intersegment
Total segment revenue
Segment EBITDA
Depreciation and amortization (1)
Year Ended December 31, 2017
Revenue:
Third Party
Intersegment
Total segment revenue
Segment EBITDA
Depreciation and amortization (1)
North America
Europe
Specialty
Eliminations
Consolidated
$
$
$
$
$
$
$
$
$
5,208,589
705
5,209,294
712,957
93,747
$
$
$
5,838,124
—
5,838,124
454,220
191,195
$
$
$
1,459,396 $
— $
12,506,109
4,646
(5,351)
—
1,464,042
$
(5,351) $
12,506,109
161,184 $
29,464
— $
1,328,361
—
314,406
5,181,964 $
5,221,754 $
1,472,956 $
— $
11,876,674
645
—
4,724
(5,369)
—
5,182,609 $
5,221,754 $
1,477,680 $
(5,369) $
11,876,674
660,153 $
422,721 $
168,525 $
87,348
178,473
28,256
— $
1,251,399
—
294,077
4,798,901 $
3,636,811 $
1,301,197 $
— $
9,736,909
750
—
4,319
(5,069)
—
4,799,651 $
3,636,811 $
1,305,516 $
(5,069) $
9,736,909
655,275 $
319,156 $
142,159 $
86,303
120,805
23,095
— $
1,116,590
—
230,203
(1) Amounts presented include depreciation and amortization expense recorded within cost of goods sold.
The key measure of segment profit or loss reviewed by our chief operating decision maker, who is our Chief Executive Officer, is Segment EBITDA.
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 acquisition 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, and impairment charges. EBITDA, which is the basis for Segment EBITDA, is calculated as net income, less net income (loss) attributable to
continuing and discontinued noncontrolling interest, excluding discontinued operations and discontinued noncontrolling interest, depreciation, amortization,
interest (which includes gains and losses on debt extinguishment) and income tax expense.
111
The table below provides a reconciliation of Net Income to Segment EBITDA (in thousands):
Net income
Less: net income attributable to continuing noncontrolling interest
Less: net income attributable to discontinued noncontrolling interest
Net income attributable to LKQ stockholders
Subtract:
Net income (loss) from discontinued operations
Net income attributable to discontinued noncontrolling interest
Net income from continuing operations attributable to LKQ stockholders
Add:
Depreciation and amortization
Depreciation and amortization - cost of goods sold
Depreciation and amortization - restructuring expenses - cost of goods sold
Depreciation and amortization - restructuring expenses
Interest expense, net of interest income
(Gain) loss on debt extinguishment
Provision for income taxes
EBITDA
Subtract:
Equity in (losses) earnings of unconsolidated subsidiaries (1)
Fair value loss on Mekonomen derivative instrument (1)
Gain due to resolution of acquisition related matter
Gains on bargain purchases and previously held equity interests (2)
Add:
Restructuring and acquisition related expenses (3)
Restructuring expenses - cost of goods sold (4)
Inventory step-up adjustment - acquisition related
Impairment of net assets held for sale and goodwill (5) (6)
Change in fair value of contingent consideration liabilities
Year Ended December 31,
2019
545,034 $
2018
483,168 $
2017
530,228
$
2,800
974
3,050
—
(3,516)
—
541,260
480,118
533,744
1,619
(974)
(4,397)
—
(6,746)
—
540,615
484,515
540,490
290,770
21,007
305
2,324
274,213
19,864
—
—
219,546
10,657
—
—
136,274
144,536
100,620
(128)
1,350
456
215,330
191,395
235,560
1,206,497
1,115,873
1,107,329
(32,277)
—
12,063
1,157
34,658
20,654
—
47,102
393
(64,471)
(5,168)
—
2,418
32,428
—
403
35,682
(208)
5,907
—
—
3,870
19,672
—
3,584
—
(4,218)
Segment EBITDA
$
1,328,361 $
1,251,399 $
1,116,590
(1) Refer to "Investments in Unconsolidated Subsidiaries" in Note 4, "Summary of Significant Accounting Policies," for further information.
(2) Reflects the gains on bargain purchases and previously held equity interests related to our acquisitions of wholesale businesses in Europe and Andrew
Page. See Note 2, "Business Combinations," for further information on bargain purchases.
(3) Excludes $2 million of depreciation expense that is reported in Restructuring and acquisition related expenses in our Consolidated Statements of Income.
Refer to Note 6, "Restructuring and Acquisition Related Expenses," for further information.
(4) Refer to Note 6, "Restructuring and Acquisition Related Expenses," for further information.
(5) Refer to "Intangible Assets" in Note 4, "Summary of Significant Accounting Policies," for further information on the impairment of goodwill recorded in
2018.
(6) Refer to "Net Assets Held for Sale" in Note 4, "Summary of Significant Accounting Policies," for further information on the impairment charges recorded
during 2019. In 2018, amounts were recorded in Interest income and other income, net in our Consolidated Statements of Income.
The following table presents capital expenditures by reportable segment (in thousands):
112
Capital Expenditures
North America
Europe
Specialty
Discontinued operations
Total capital expenditures
Year Ended December 31,
2019
2018
2017
$
$
131,643 $
129,391 $
121,596
12,491
—
99,885
20,751
—
95,823
71,494
8,175
3,598
265,730 $
250,027 $
179,090
The following table presents assets by reportable segment (in thousands):
Receivables, net
North America
Europe
Specialty
Total receivables, net
Inventories
North America
Europe
Specialty
Total inventories
Property, plant and equipment, net
North America
Europe
Specialty
December 31,
2019
2018
2017
$
419,452 $
411,818 $
636,216
75,464
649,174
93,091
379,666
555,372
92,068
1,131,132
1,154,083
1,027,106
991,062
1,401,801
379,914
2,772,777
610,573
538,951
84,876
1,076,306
1,410,264
349,505
2,836,075
570,508
562,600
87,054
Total property, plant and equipment, net
1,234,400
1,220,162
Operating lease assets, net (1)
North America
Europe
Specialty
Total operating lease assets, net
Equity method investments
North America
Europe (2)
Total equity method investments
Other unallocated assets
Total assets
768,164
457,035
83,312
1,308,511
17,624
121,619
139,243
—
—
—
—
16,404
162,765
179,169
6,193,893
6,003,913
$
12,779,956 $
11,393,402 $
1,076,393
964,068
340,322
2,380,783
537,286
293,539
82,264
913,089
—
—
—
—
336
208,068
208,404
4,837,490
9,366,872
(1) Refer to Note 13, "Leases," for further information.
(2) Refer to "Investments in Unconsolidated Subsidiaries" in Note 4, "Summary of Significant Accounting Policies," for further information on the decrease
in the balance from December 31, 2018 to December 31, 2019.
We report net receivables; inventories; net property, plant and equipment; net operating lease assets; and equity method investments 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 and other current and noncurrent assets, goodwill and other intangibles.
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, Poland, Slovakia, Austria, and other European countries. Our
113
operations in other countries include operations in Canada, engine 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 thousands):
Revenue
United States
United Kingdom
Germany
Other countries
Total revenue
Year Ended December 31,
2019
2018
2017
$
6,220,267 $
6,192,636 $
1,599,074
1,578,543
3,108,225
1,665,317
974,514
3,044,207
$
12,506,109 $
11,876,674 $
5,662,016
1,548,212
1,744
2,524,937
9,736,909
The following table sets forth our tangible long-lived assets by geographic area (in thousands):
Long-lived assets (1)
United States
Germany
United Kingdom
Other countries
Total long-lived assets
December 31,
2019
2018
2017
$
$
1,467,701 $
620,125 $
340,995
330,113
404,102
217,476
165,145
217,416
2,542,911 $
1,220,162 $
583,236
41
178,021
151,791
913,089
(1) The increase in long-lived assets is primarily related to the net operating lease assets added as a result of the adoption of the new lease accounting
standard. Refer to Note 13, "Leases," for further information.
Note 17. Selected Quarterly Data (unaudited)
The following table presents unaudited selected quarterly financial data for the two years ended December 31, 2019. The operating results for any quarter
are not necessarily indicative of the results for any future period.
(In thousands, except per share data)
2019
Revenue
Gross margin
Operating income (1)
Income from continuing operations (2)
Net income from discontinued operations (5) (6)
Net income
Net income (loss) attributable to continuing noncontrolling interest
Net income attributable to discontinued noncontrolling interest
Dec. 31
Sep. 30
Jun. 30
Mar. 31 (2)
Quarter Ended (1)
$
3,009,860 $
3,147,773 $
3,248,173 $
3,100,303
1,196,014
1,200,329
1,247,187
1,208,264
206,768
140,833
440
231,364
151,812
781
236,111
151,707
398
141,273
152,593
152,105
479
406
(46)
376
1,352
192
222,400
99,063
—
99,063
1,015
—
98,048
Net income attributable to LKQ stockholders
140,388
152,263
150,561
Basic earnings per share from continuing operations (7)
Diluted earnings per share from continuing operations (7)
$
$
0.46 $
0.46 $
0.49 $
0.49 $
0.49 $
0.49 $
0.31
0.31
114
(In thousands, except per share data)
2018
Revenue
Gross margin
Operating income (4)
Income from continuing operations (2)
Net loss from discontinued operations (5)
Net income
Net income (loss) attributable to continuing noncontrolling interest
Net income attributable to LKQ stockholders
Dec. 31 (2) (4) (5)
Sep. 30 (2)
Jun. 30
Mar. 31
Quarter Ended (3)
$
3,002,781 $
3,122,378 $
3,030,751 $
1,161,809
1,197,198
1,161,879
164,146
42,456
(4,397)
38,059
2,010
36,049
234,733
134,480
—
134,480
378
134,102
256,794
157,866
—
157,866
859
157,007
2,720,764
1,053,971
226,568
152,763
—
152,763
(197)
152,960
Basic earnings per share from continuing operations (7)
Diluted earnings per share from continuing operations (7)
$
$
0.13 $
0.13 $
0.42 $
0.42 $
0.51 $
0.50 $
0.49
0.49
(1) Reflects impairment charges of $15 million, $33 million, and $2 million to net assets held for sale recorded in the first, second, and fourth quarters of
2019, respectively, and a $4 million net reversal of impairment in the third quarter of 2019. See "Net Assets Held for Sale" in Note 4, "Summary of
Significant Accounting Policies," for further information.
(2) Reflects impairment charges of $40 million in the first quarter of 2019, and charges of $48 million and $23 million in the fourth and third quarters of
2018, respectively, related to the Mekonomen equity investment. See "Investments in Unconsolidated Subsidiaries" in Note 4, "Summary of Significant
Accounting Policies," for further information.
(3) The 2018 amounts presented above include the results of operations of Stahlgruber, from its acquisition effective May 30, 2018.
(4) Reflects a $33 million goodwill impairment charge on the Aviation reporting unit recorded in the fourth quarter of 2018. See "Intangible Assets" in Note
4, "Summary of Significant Accounting Policies," for further information.
(5)
In the first quarter of 2017, LKQ completed the sale of the glass manufacturing business of its PGW subsidiary. During the fourth quarter of 2019, we
incurred costs related to the disposal of the glass manufacturing business of PGW and settled certain tax matters. During the fourth quarter of 2018, we
recorded a final tax expense adjustment of $4 million to the loss on sale of the glass manufacturing business of PGW. See "Glass Manufacturing
Business" in Note 3, "Discontinued Operations" for further information regarding the disposal of the glass manufacturing business.
(6)
In the second quarter of 2019, we classified the acquired Stahlgruber Czech Republic wholesale business as discontinued operations. See "Czech
Republic" in Note 3, "Discontinued Operations" for further information regarding the planned disposal of the Czech Republic business.
(7) The sum of the quarters may not equal the total of the respective year's earnings per share on either a basic or diluted basis due to changes in weighted
average shares outstanding throughout the year.
Note 18. Condensed Consolidating Financial Information
LKQ Corporation (the "Parent") issued, and the Guarantors have fully and unconditionally guaranteed, jointly and severally, the U.S. Notes (2023) due on
May 15, 2023. A Guarantor's guarantee will be unconditionally and automatically released and discharged upon the occurrence of any of the following events: (i) a
transfer (including as a result of consolidation or merger) by the Guarantor to any person that is not a Guarantor of all or substantially all assets and properties of
such Guarantor, provided the Guarantor is also released from its obligations with respect to indebtedness under the Credit Agreement or other indebtedness of ours,
which obligation gave rise to the guarantee of the U.S. Notes (2023); (ii) a transfer (including as a result of consolidation or merger) to any person that is not a
Guarantor of the equity interests of a Guarantor or issuance by a Guarantor of its equity interests such that the Guarantor ceases to be a subsidiary, as defined in the
U.S. Notes (2023) Indenture, provided the Guarantor is also released from its obligations with respect to indebtedness under the Credit Agreement or other
indebtedness of ours, which obligation gave rise to the guarantee of the U.S. Notes (2023); (iii) the release of the Guarantor from its obligations with respect to
indebtedness under the Credit Agreement or other indebtedness of ours, which obligation gave rise to the guarantee of the U.S. Notes (2023); and (iv) upon legal
defeasance, covenant defeasance or satisfaction and discharge of the U.S. Notes (2023) Indenture, as defined in the U.S. Notes (2023) Indenture.
115
Presented below are the condensed consolidating financial statements of the Parent, the Guarantors, the non-guarantor subsidiaries (the "Non-
Guarantors"), and the elimination entries necessary to present our financial statements on a consolidated basis as required by Rule 3-10 of Regulation S-X of the
Securities Exchange Act of 1934 resulting from the guarantees of the U.S. Notes (2023). Investments in consolidated subsidiaries have been presented under the
equity method of accounting. The principal elimination entries eliminate investments in subsidiaries, intercompany balances, and intercompany revenue and
expenses. The condensed consolidating financial statements below have been prepared from our financial information on the same basis of accounting as the
consolidated financial statements, and may not necessarily be indicative of the financial position, results of operations or cash flows had the Parent, Guarantors and
Non-Guarantors operated as independent entities.
On January 10, 2020, we redeemed the U.S Notes (2023) at which point the guarantees were released. Refer to "U.S. Notes (2023)" in Note 10 "Long-
Term Obligations," for further information on the redemption.
116
LKQ CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Income
(In thousands)
Revenue
Cost of goods sold
Gross margin
Selling, general and administrative expenses
Restructuring and acquisition related expenses
Impairment of net assets held for sale and goodwill
Depreciation and amortization
Operating (loss) income
Other expense (income):
Interest expense
Intercompany interest (income) expense, net
Gain on debt extinguishment
Interest income and other (income) expense, net
Total other (income) expense, net
(Loss) income from continuing operations before (benefit)
provision for income taxes
(Benefit) provision for income taxes
Equity in earnings (losses) of unconsolidated subsidiaries
Equity in earnings of subsidiaries
Income from continuing operations
Net income (loss) from discontinued operations
Net income
Less: net income attributable to continuing noncontrolling interest
Less: net income attributable to discontinued noncontrolling
interest
Parent
Guarantors
Eliminations
Consolidated
Year Ended December 31, 2019
Non-Guarantors
$
— $
6,269,185 $
6,384,822 $
(147,898) $
12,506,109
3,711,074
4,091,139
(147,898)
—
—
2,558,111
2,293,683
45,914
1,732,282
1,802,104
—
—
479
8,644
39,355
28,335
7,747
105,288
185,003
(46,393)
672,542
270,494
7,654,315
4,851,794
3,580,300
36,979
47,102
290,770
896,643
—
—
—
—
—
—
52,376
299
85,829
—
138,504
(58,762)
—
(13,269)
(19,655)
(26,738)
(7,062)
—
559,317
539,641
1,619
541,260
—
—
32,899
(128)
(20,376)
12,694
659,848
169,173
1,220
10,824
502,719
(1,253)
501,466
—
—
25,863
—
890
112,582
157,912
53,219
(33,497)
—
71,196
1,673
72,869
2,800
974
—
—
—
—
—
—
—
(570,141)
(570,141)
(420)
(570,561)
—
—
—
(128)
(32,755)
105,621
791,022
215,330
(32,277)
—
543,415
1,619
545,034
2,800
974
Net income attributable to LKQ stockholders
$
541,260 $
501,466 $
69,095 $
(570,561) $
541,260
117
LKQ CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Income
(In thousands)
Revenue
Cost of goods sold
Gross margin
Selling, general and administrative expenses
Restructuring and acquisition related expenses
Impairment of net assets held for sale and goodwill
Depreciation and amortization
Operating (loss) income
Other expense (income):
Interest expense
Intercompany interest (income) expense, net
Loss on debt extinguishment
Interest income and other (income) expense, net
Total other expense, net
(Loss) income from continuing operations before (benefit)
provision for income taxes
(Benefit) provision for income taxes
Equity in earnings (losses) of unconsolidated subsidiaries
Equity in earnings of subsidiaries
Income from continuing operations
Net loss from discontinued operations
Net income
Less: net income attributable to noncontrolling interest
Parent
Guarantors
Eliminations
Consolidated
Year Ended December 31, 2018
Non-Guarantors
$
— $
6,276,951 $
5,766,958 $
(167,235) $
11,876,674
3,783,376
3,685,676
(167,235)
—
—
2,493,575
2,081,282
27,394
1,713,118
1,612,219
—
—
137
3,140
33,244
99,665
(27,531)
644,408
66,794
(65,072)
1,350
(1,082)
1,990
(29,521)
(18,600)
—
495,436
484,515
(4,397)
480,118
—
640
40,756
—
(15,586)
25,810
618,598
163,937
173
16,598
471,432
(4,397)
467,035
—
29,288
—
174,411
265,364
78,943
24,316
—
7,751
111,010
154,354
46,058
(64,644)
—
43,652
—
43,652
3,050
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(512,034)
(512,034)
4,397
(507,637)
—
7,301,817
4,574,857
3,352,731
32,428
33,244
274,213
882,241
146,377
—
1,350
(8,917)
138,810
743,431
191,395
(64,471)
—
487,565
(4,397)
483,168
3,050
480,118
Net income attributable to LKQ stockholders
$
480,118 $
467,035 $
40,602 $
(507,637) $
118
LKQ CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Income
(In thousands)
Revenue
Cost of goods sold
Gross margin
Selling, general and administrative expenses
Restructuring and acquisition related expenses
Depreciation and amortization
Operating (loss) income
Other expense (income):
Interest expense
Intercompany interest (income) expense, net
Loss on debt extinguishment
Interest income and other expense (income), net
Total other expense (income), net
(Loss) income from continuing operations before provision
for income taxes
Provision for income taxes
Equity in earnings of unconsolidated subsidiaries
Equity in earnings of subsidiaries
Income from continuing operations
Net (loss) income from discontinued operations
Net income
Less: net loss attributable to noncontrolling interest
Parent
Guarantors
Eliminations
Consolidated
Year Ended December 31, 2017
Non-Guarantors
$
— $
5,780,904 $
4,116,161 $
(160,156) $
9,736,909
3,458,304
2,639,138
(160,156)
—
—
2,322,600
1,477,023
29,884
1,557,883
1,127,640
—
118
7,352
96,717
(30,002)
660,648
66,030
(17,873)
456
242
48,855
(78,857)
28,684
—
648,031
540,490
(6,746)
533,744
—
546
(2,383)
—
(14,323)
(16,160)
676,808
168,288
—
21,836
530,356
(6,746)
523,610
—
12,320
122,711
214,352
35,064
20,256
—
(9,644)
45,676
168,676
38,588
5,907
—
135,995
2,050
138,045
(3,516)
—
—
—
—
—
—
—
—
—
—
—
—
—
(669,867)
(669,867)
4,696
(665,171)
—
5,937,286
3,799,623
2,715,407
19,672
219,546
844,998
101,640
—
456
(23,725)
78,371
766,627
235,560
5,907
—
536,974
(6,746)
530,228
(3,516)
533,744
Net income attributable to LKQ stockholders
$
533,744 $
523,610 $
141,561 $
(665,171) $
119
LKQ CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Comprehensive Income
(In thousands)
Parent
Guarantors
Year Ended December 31, 2019
Non-Guarantors
Eliminations
Consolidated
545,034
Net income
$
541,260 $
501,466 $
72,869 $
(570,561) $
Less: net income attributable to continuing noncontrolling interest
Less: net income attributable to discontinued noncontrolling interest
—
—
—
—
2,800
974
—
—
2,800
974
Net income attributable to LKQ stockholders
541,260
501,466
69,095
(570,561)
541,260
Other comprehensive (loss) income:
Foreign currency translation, net of tax
Net change in unrealized gains/losses on cash flow hedges, net of tax
Net change in unrealized gains/losses on pension plans, net of tax
Net change in other comprehensive income from unconsolidated
subsidiaries
Other comprehensive loss
6,704
(9,016)
(23,859)
236
(25,935)
5,477
—
(6,088)
—
(611)
5,360
—
(10,837)
—
(17,771)
23,859
6,704
(9,016)
(23,859)
236
(236)
236
(12,175)
12,786
(25,935)
Comprehensive income
515,325
500,855
60,694
(557,775)
519,099
Less: comprehensive income attributable to continuing noncontrolling
interest
Less: comprehensive income attributable to discontinued noncontrolling
interest
—
—
—
—
2,800
974
—
—
2,800
974
Comprehensive income attributable to LKQ stockholders
$
515,325 $
500,855 $
56,920 $
(557,775) $
515,325
120
LKQ CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Comprehensive Income
(In thousands)
Parent
Guarantors
Year Ended December 31, 2018
Non-Guarantors
Eliminations
Consolidated
483,168
Net income
$
480,118 $
467,035 $
43,652 $
(507,637) $
Less: net income attributable to noncontrolling interest
—
—
3,050
—
3,050
Net income attributable to LKQ stockholders
480,118
467,035
40,602
(507,637)
480,118
Other comprehensive (loss) income:
Foreign currency translation, net of tax
Net change in unrealized gains/losses on cash flow hedges, net of tax
Net change in unrealized gains/losses on pension plans, net of tax
Net change in other comprehensive loss from unconsolidated
subsidiaries
Other comprehensive loss
(108,523)
350
697
(8,628)
—
1,266
(75,462)
84,090
(108,523)
—
(569)
—
(697)
350
697
(2,343)
—
(109,819)
(7,362)
(2,343)
(78,374)
2,343
(2,343)
85,736
(109,819)
Comprehensive income (loss)
370,299
459,673
(34,722)
(421,901)
Less: comprehensive income attributable to noncontrolling interest
—
—
3,050
—
373,349
3,050
Comprehensive income (loss) attributable to LKQ stockholders
$
370,299 $
459,673 $
(37,772) $
(421,901) $
370,299
121
LKQ CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Comprehensive Income
(In thousands)
Parent
Guarantors
Year Ended December 31, 2017
Non-Guarantors
Eliminations
$
533,744 $
523,610 $
138,045 $
(665,171) $
Consolidated
530,228
Net income
Less: net loss attributable to noncontrolling interest
Net income attributable to LKQ stockholders
Other comprehensive income (loss):
Foreign currency translation, net of tax
Net change in unrealized gains/losses on cash flow hedges, net of tax
Net change in unrealized gains/losses on pension plans, net of tax
Net change in other comprehensive loss from unconsolidated
subsidiaries
Other comprehensive income
—
—
(3,516)
—
(3,516)
533,744
523,610
141,561
(665,171)
533,744
200,596
3,447
(6,035)
(1,309)
196,699
16,743
(133)
(3,254)
206,049
(222,792)
200,596
—
(2,781)
133
6,035
3,447
(6,035)
—
(1,309)
1,309
(1,309)
13,356
201,959
(215,315)
196,699
Comprehensive income
730,443
536,966
340,004
(880,486)
Less: comprehensive loss attributable to noncontrolling interest
—
—
(3,516)
—
726,927
(3,516)
Comprehensive income attributable to LKQ stockholders
$
730,443 $
536,966 $
343,520 $
(880,486) $
730,443
122
LKQ CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
(In thousands)
Parent
Guarantors
Non-Guarantors
Eliminations
Consolidated
December 31, 2019
Assets
Current assets:
Cash and cash equivalents
Receivables, net
Intercompany receivables, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Operating lease assets, net
Intangible assets:
Goodwill
Other intangibles, net
Investment in subsidiaries
Intercompany notes receivable
Equity method investments
Other noncurrent assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Intercompany payables, net
Accrued expenses:
Accrued payroll-related liabilities
Refund liability
Other accrued expenses
Other current liabilities
Current portion of operating lease liabilities
Current portion of long-term obligations
Total current liabilities
Long-term operating lease liabilities, excluding current portion
Intercompany notes payable
Deferred income taxes
Other noncurrent liabilities
Redeemable noncontrolling interest
Stockholders' equity:
Total Company stockholders’ equity
Noncontrolling interest
Total stockholders’ equity
$
240,476 $
44,326 $
238,218 $
—
304,416
9,822
—
826,716
18,261
—
1,289,389
1,483,388
11,606
94,146
155,138
— $
—
523,020
1,131,132
(28,083)
—
—
—
—
—
—
261,904
1,732,277
2,721,721
(28,083)
423
3,701
640,648
808,726
593,329
496,084
—
564
5,345,724
1,021,380
—
64,080
2,012,282
2,394,253
249,497
127,551
120,099
17,624
39,204
600,277
—
—
(5,473,275)
(1,141,479)
121,619
49,826
—
—
—
2,772,777
260,890
4,687,819
1,234,400
1,308,511
4,406,535
850,338
—
—
139,243
153,110
$
6,697,776 $
5,747,908 $
6,977,109 $
(6,642,837) $
12,779,956
$
2,883 $
397,647 $
542,265 $
— $
942,795
—
18,261
9,822
(28,083)
—
8,837
—
8,895
282
224
202,220
223,341
3,883
66,877
46,789
119,352
23,641
119,538
3,124
795,229
721,584
103,489
50,525
161,436
97,700
101,765
121,023
1,188,025
412,130
—
5,229
125,432
—
517,361
161,574
80,611
—
624,118
143,326
159,629
24,077
—
—
—
—
—
(28,083)
—
—
(1,141,479)
—
—
—
179,203
97,314
289,683
121,623
221,527
326,367
2,178,512
1,137,597
3,715,389
—
310,129
365,672
24,077
5,008,876
3,457,281
2,015,994
(5,473,275)
5,008,876
—
—
39,704
—
39,704
5,008,876
3,457,281
2,055,698
(5,473,275)
5,048,580
Long-term obligations, excluding current portion
1,331,015
14,268
2,370,106
Total liabilities and stockholders' equity
$
6,697,776 $
5,747,908 $
6,977,109 $
(6,642,837) $
12,779,956
123
LKQ CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
(In thousands)
Parent
Guarantors
Non-Guarantors
Eliminations
Consolidated
December 31, 2018
$
25,633 $
29,285 $
276,843 $
310
6,978
316,726
—
837,047
12,880
—
1,343,612
1,492,463
18,611
99,356
81,063
51,532
1,788,979
2,700,296
(19,858)
1,547
600,054
618,561
—
260
5,224,006
1,220,582
—
70,283
1,973,364
2,408,094
272,451
111,826
10,515
16,404
40,548
656,041
—
—
(5,335,832)
(1,231,097)
162,765
52,081
—
—
— $
—
331,761
1,154,083
(19,858)
—
—
—
—
—
—
2,836,075
199,030
4,520,949
1,220,162
4,381,458
928,752
—
—
179,169
162,912
$
6,568,210 $
4,814,141 $
6,597,838 $
(6,586,787) $
11,393,402
$
2,454 $
343,116 $
596,828 $
— $
942,398
—
12,880
6,978
(19,858)
—
6,652
—
5,454
283
8,459
23,302
1,628,677
—
8,045
125,888
70,267
50,899
105,672
17,860
2,932
603,626
13,532
597,283
135,355
99,147
95,086
53,686
177,299
42,966
110,435
1,083,278
2,546,465
633,814
168,034
139,159
—
—
—
—
—
(19,858)
—
(1,231,097)
—
—
172,005
104,585
288,425
61,109
121,826
1,690,348
4,188,674
—
311,434
364,194
4,782,298
3,365,198
1,970,634
(5,335,832)
4,782,298
—
—
56,454
—
56,454
4,782,298
3,365,198
2,027,088
(5,335,832)
4,838,752
Assets
Current assets:
Cash and cash equivalents
Receivables, net
Intercompany receivables, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Intangible assets:
Goodwill
Other intangibles, net
Investment in subsidiaries
Intercompany notes receivable
Equity method investments
Other noncurrent assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Intercompany payables, net
Accrued expenses:
Accrued payroll-related liabilities
Refund liability
Other accrued expenses
Other current liabilities
Current portion of long-term obligations
Total current liabilities
Long-term obligations, excluding current portion
Intercompany notes payable
Deferred income taxes
Other noncurrent liabilities
Total Company stockholders’ equity
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders' equity
$
6,568,210 $
4,814,141 $
6,597,838 $
(6,586,787) $
11,393,402
124
LKQ CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Parent
Year Ended December 31, 2019
Non-Guarantors
(1)
Guarantors
Eliminations
Consolidated
Net cash provided by operating activities
$
500,658 $
275,443 $
378,100 $
(90,168) $
1,064,033
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
Proceeds from disposals of property, plant and equipment
Investment and intercompany note activity with subsidiaries
Acquisitions, net of cash and restricted cash acquired
Proceeds from disposal of businesses
Investments in unconsolidated subsidiaries
Receipts of deferred purchase price on receivables under factoring
arrangements
Other investing activities, net
(564)
—
130,600
—
—
—
—
967
(134,992)
(130,174)
6,821
—
(23,643)
19,682
(3,250)
358,995
286
—
—
9,224
—
(130,600)
(3,653)
(1,213)
(4,344)
—
—
—
(265,730)
16,045
—
(27,296)
18,469
(7,594)
—
—
(358,995)
—
—
1,253
Net cash provided by (used in) investing activities
131,003
223,899
(130,160)
(489,595)
(264,853)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock
Borrowings under revolving credit facilities
Repayments under revolving credit facilities
Repayments under term loans
Borrowings under receivables securitization facility
Repayments under receivables securitization facility
Payment of notes issued and assumed debt from acquisitions
Repayments of other debt, net
Other financing activities, net
Investment and intercompany note activity with parent
Dividends
(291,813)
218,000
(316,692)
(8,750)
—
—
(19,123)
(749)
2,309
—
—
—
—
—
—
—
—
—
(2,185)
—
(34,026)
(449,163)
—
387,708
(417,779)
—
36,600
(146,600)
—
(30,988)
(10,607)
(96,574)
—
—
—
—
—
—
—
—
—
—
130,600
449,163
(291,813)
605,708
(734,471)
(8,750)
36,600
(146,600)
(19,123)
(33,922)
(8,298)
—
—
Net cash used in financing activities
(416,818)
(485,374)
(278,240)
579,763
(600,669)
Effect of exchange rate changes on cash, cash equivalents and restricted
cash
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash of continuing operations,
—
214,843
1,073
15,041
(1,977)
(32,277)
—
—
(904)
197,607
beginning of period
25,633
29,285
282,332
—
337,250
Cash, cash equivalents and restricted cash of continuing and discontinued
operations, end of period
240,476
44,326
250,055
—
534,857
Less: Cash and cash equivalents of discontinued operations, end of
period
—
—
6,470
—
6,470
Cash, cash equivalents and restricted cash, end of period
$
240,476 $
44,326 $
243,585 $
— $
528,387
(1) Restricted cash is only included in the condensed consolidating financial information of the Non-Guarantors
125
LKQ CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Parent
Year Ended December 31, 2018
Non-Guarantors
(1)
Guarantors
Eliminations
Consolidated
Net cash provided by operating activities
$
481,138 $
277,595 $
111,213 $
(159,207) $
710,739
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
Proceeds from disposals of property, plant and equipment
Investment and intercompany note activity with subsidiaries
Return of investment in subsidiaries
Acquisitions, net of cash and restricted cash acquired
Investments in unconsolidated subsidiaries
Receipts of deferred purchase price on receivables under factoring
arrangements
Other investing activities, net
(848)
—
(97,261)
143,524
—
—
—
887
(136,033)
(113,146)
22,393
5,266
—
—
(250,027)
27,659
—
—
—
—
97,261
(143,524)
—
—
(8,217)
(1,206,778)
(12,216)
(48,084)
—
—
(1,214,995)
(60,300)
317,091
36,991
(317,091)
180
666
—
36,991
1,733
Net cash provided by (used in) investing activities
46,302
183,198
(1,325,085)
(363,354)
(1,458,939)
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issuance costs
Proceeds from issuance of Euro Notes (2026/28)
Purchase of treasury stock
Borrowings under revolving credit facilities
Repayments under revolving credit facilities
Repayments under term loans
Borrowings under receivables securitization facility
Repayments under receivables securitization facility
Payment of notes issued and assumed debt from acquisitions
Repayments of other debt, net
Other financing activities, net
Investment and intercompany note activity with parent
Dividends
(5,434)
—
(60,000)
765,632
(884,863)
(354,800)
—
—
—
(385)
3,683
—
—
—
—
—
—
—
—
—
—
—
(3,636)
—
(15,694)
1,232,100
—
901,693
(644,107)
—
10,120
(120)
(54,888)
(7,709)
1,403
(68,435)
165,696
(392,883)
(226,939)
Net cash (used in) provided by financing activities
(536,167)
(464,954)
1,361,555
Effect of exchange rate changes on cash, cash equivalents and restricted
cash
Net (decrease) increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
—
(8,727)
34,360
(1,685)
(5,846)
35,131
(75,626)
72,057
210,275
—
—
—
—
—
—
—
—
—
—
—
(97,261)
619,822
522,561
—
—
—
Cash, cash equivalents and restricted cash, end of period
$
25,633
$
29,285
$
282,332
$
— $
(21,128)
1,232,100
(60,000)
1,667,325
(1,528,970)
(354,800)
10,120
(120)
(54,888)
(11,730)
5,086
—
—
882,995
(77,311)
57,484
279,766
337,250
(1) Restricted cash is only included in the condensed consolidating financial information of the Non-Guarantors
126
LKQ CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Parent
Year Ended December 31, 2017
Non-Guarantors
Guarantors
Eliminations
Consolidated
Net cash provided by operating activities
$
243,011 $
186,459 $
95,617 $
(6,187) $
518,900
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
Proceeds from disposals of property, plant and equipment
Investment and intercompany note activity with subsidiaries
Acquisitions, net of cash and restricted cash acquired
Proceeds from disposals of businesses
Investments in unconsolidated subsidiaries
Receipts of deferred purchase price on receivables under factoring
arrangements (1)
Other investing activities, net
(648)
—
57,735
—
—
—
—
—
(87,102)
(91,340)
6,490
—
2,217
—
(335,582)
(177,506)
305,740
(2,750)
(4,443)
(4,914)
—
—
(57,735)
—
—
—
294,925
—
(294,925)
—
5,243
—
(179,090)
8,707
—
(513,088)
301,297
(7,664)
—
5,243
Net cash provided by (used in) investing activities
57,087
181,721
(270,743)
(352,660)
(384,595)
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issuance costs
Borrowings under revolving credit facilities
Repayments under revolving credit facilities
Repayments under term loans
Borrowings under receivables securitization facility
Repayments under receivables securitization facility
(Repayments) borrowings of other debt, net
Other financing activities, net
Investment and intercompany note activity with parent
Dividends
(4,267)
558,000
(824,862)
(27,884)
—
—
(1,700)
1,945
—
—
—
—
—
—
—
—
(1,318)
(1,336)
(65,498)
(301,112)
—
281,171
(121,615)
—
11,245
(11,245)
22,724
6,575
7,763
—
Net cash (used in) provided by financing activities
(298,768)
(369,264)
196,618
Effect of exchange rate changes on cash, cash equivalents and restricted
cash
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash of continuing operations,
—
1,330
706
(378)
22,806
44,298
—
—
—
—
—
—
—
—
57,735
301,112
358,847
—
—
(4,267)
839,171
(946,477)
(27,884)
11,245
(11,245)
19,706
7,184
—
—
(112,567)
23,512
45,250
beginning of period
33,030
35,360
159,010
—
227,400
Add: Cash, cash equivalents and restricted cash of discontinued
operations, beginning of period
Cash, cash equivalents and restricted cash of continuing and
discontinued operations, beginning of period
—
149
6,967
—
7,116
33,030
35,509
165,977
—
— $
234,516
279,766
Cash, cash equivalents and restricted cash, end of period
$
34,360 $
35,131 $
210,275 $
(1) Reflects the impact of adopting ASU 2016-15
127
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
128
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2019, the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of
LKQ Corporation's management, including our Chief Executive Officer and our Chief Financial Officer, of our "disclosure controls and procedures" (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file with the Securities and
Exchange Commission ("SEC") is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that
information required to be disclosed is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Report of Management on Internal Control over Financial Reporting dated February 27, 2020
Management of LKQ Corporation and subsidiaries (the "Company") is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and
directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company's assets that could have a material effect on the Company's financial statements.
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices, and actions taken to correct
deficiencies as identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2019. Management based this
assessment on criteria for effective internal control over financial reporting described in Internal Control—Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Management's assessment included an evaluation of the design of the Company's internal control over
financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment
with the Audit Committee of the Company's Board of Directors.
Based on this assessment, management determined that, as of December 31, 2019, the Company maintained effective internal control over financial
reporting. Deloitte & Touche LLP, independent registered public accounting firm, who audited and reported on the consolidated financial statements of the
Company included in this report, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2019.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal
quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
129
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of LKQ Corporation:
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of LKQ Corporation and subsidiaries (the “Company”) as of December 31, 2019, based on
criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control – Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 27, 2020, expressed an unqualified opinion on
those consolidated financial statements and included an explanatory paragraph regarding the Company's adoption of ASC Topic 842, Leases.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America
("generally accepted accounting principles"). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 27, 2020
130
131
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
Directors
The information appearing under the caption "Election of our Board of Directors" in our Proxy Statement for the Annual Meeting of Stockholders to be
held May 12, 2020 (the "Proxy Statement") is incorporated herein by reference.
Executive Officers
Our executive officers, their ages at December 31, 2019, and their positions with us are set forth below. Our executive officers are elected by and serve at
the discretion of our Board of Directors.
Name
Dominick Zarcone
Varun Laroyia
Arnd Franz
Victor M. Casini
Walter P. Hanley
Justin L. Jude
Michael T. Brooks
Matthew J. McKay
Michael S. Clark
Age
61
Position
President, Chief Executive Officer and Director
48
54
57
53
43
50
42
45
Executive Vice President and Chief Financial Officer
Chief Executive Officer, LKQ Europe
Senior Vice President, General Counsel and Corporate Secretary
Senior Vice President - Development
Senior Vice President of Operations - Wholesale Parts Division
Senior Vice President and Chief Information Officer
Senior Vice President - Human Resources
Vice President - Finance and Controller
Dominick Zarcone became our President and Chief Executive Officer in May 2017. Mr. Zarcone was our Executive Vice President and Chief Financial Officer
from March 2015 to May 2017. Prior to joining our Company, he was the Managing Director and Chief Financial Officer of Baird Financial Group, a capital
markets and wealth management company, and certain of its affiliates from April 2011 to March 2015. He also served from April 2011 to March 2015 as Treasurer
of Baird Funds, Inc., a family of fixed income and equity mutual funds managed by Robert W. Baird & Co. Incorporated, a registered broker/dealer. From
February 1995 to April 2011, Mr. Zarcone was a Managing Director of the Investment Banking department of Robert W. Baird & Co. Incorporated. From
February 1986 to February 1995, he was with the investment banking company Kidder, Peabody & Co., Incorporated, most recently as Senior Vice President of
Investment Banking. Mr. Zarcone is a member of the Board of Directors of Generac Power Systems, Inc., a designer and manufacturer of power generation
equipment and engine-powered products.
Varun Laroyia became our Executive Vice President and Chief Financial Officer in October 2017. Prior to joining our Company, he was the Chief Financial
Officer of CBRE’s Global Workplace Solutions ("GWS") business since 2015, following CBRE’s acquisition of the GWS business from Johnson Controls Inc.
(“JCI”), where he was the Chief Financial Officer and Vice President of Information Technology since 2013. From 2006 to 2013, Mr. Laroyia held various
positions at JCI including Group Vice President of Global Audit and Vice President of Finance and Administration for its Building Efficiency business across
Europe and Africa. From 2000 to 2006, Mr. Laroyia held various positions at Gateway, Inc., including Vice President and Controller based in the U.S. and Finance
Director for the United Kingdom and Ireland. Prior to Gateway, he was with General Electric in the U.S. and then GE Capital in London where he served as a
Manager of European Corporate Development. Mr. Laroyia started his career at KPMG in London.
Arnd Franz became our Chief Executive Officer, LKQ Europe in October 2019. Prior to joining us in April 2019 as Chief Operating Officer of LKQ Europe, Mr.
Franz was Corporate Executive Vice President of Automotive Sales, Application Engineering and Aftermarket of the MAHLE Group, an automotive parts
manufacturer headquartered in Stuttgart, Germany, from 2013. From 2006 until 2013, he was Executive Vice President and General Manager for MAHLE
Aftermarket. Mr. Franz also served as a member of the Board of Management of the MAHLE group from 2013 to March 2019.
132
Victor M. Casini has been our Vice President, General Counsel and Corporate Secretary from our inception in February 1998. In March 2008, he was elected
Senior Vice President. Mr. Casini was a member of our Board of Directors from May 2010 until May 2012. From July 1992 to December 2011, Mr. Casini was the
Executive Vice President and General Counsel of Flynn Enterprises, Inc., a venture capital, hedging and consulting firm. Mr. Casini served as Senior Vice
President, General Counsel and Corporate Secretary of Discovery Zone, Inc., an operator and franchiser of family entertainment centers, from July 1992 until May
1995. Prior to July 1992, Mr. Casini practiced corporate and securities law with the law firm of Bell, Boyd & Lloyd LLP (now known as K&L Gates LLP) in
Chicago, Illinois for more than five years.
Walter P. Hanley joined us in December 2002 as our Vice President of Development, Associate General Counsel and Assistant Secretary. In December 2005, he
became our Senior Vice President of Development. Mr. Hanley served as Senior Vice President, General Counsel and Secretary of Emerald Casino, Inc., an owner
of a license to operate a riverboat casino in the State of Illinois, from June 1999 until August 2002. Mr. Hanley served as Senior Vice President, General Counsel
and Secretary of Blue Chip Casino, Inc., an owner and operator of a riverboat gaming vessel in Michigan City, Indiana, from July 1996 until November 1999.
Mr. Hanley served as Vice President and Associate General Counsel of Flynn Enterprises, Inc. from May 1995 until February 1998 and as Associate General
Counsel of Discovery Zone, Inc. from March 1993 until May 1995. Prior to March 1993, Mr. Hanley practiced corporate and securities law with the law firm of
Bell, Boyd & Lloyd LLP (now known as K&L Gates LLP) in Chicago, Illinois.
Justin L. Jude became our Senior Vice President of Operations – Wholesale Parts Division in July 2015. Mr. Jude has been with us since February 2004 in various
roles, including from March 2008 to February 2011 as Vice President - Supply Chain, from February 2011 to May 2014 as Vice President – Information Systems
(North America), and from June 2014 to July 2015 as President of Keystone Automotive Operations, Inc., our specialty automotive business. Mr. Jude has been in
the Company’s industry for over 19 years.
Michael T. Brooks joined LKQ as Senior Vice President – Chief Information Officer in February 2020. Prior to joining us, Mr. Brooks held various Senior Vice
President positions, including Chief Information Officer, for GATX Corporation, a global railcar leasing company, from 2008 to 2020. Prior to GATX, he served
as Chief Information Officer for Constellation Energy, a retail energy company, from 2003 to 2008. Mr. Brooks also spent over ten years in consulting roles with a
focus on process improvement and systems implementations with firms such as Accenture and Oracle.
Matthew J. McKay became our Senior Vice President of Human Resources in June 2016. Prior thereto, he served as our Associate General Counsel from
December 2007 to May 2016, focusing on employment-related matters. Prior to joining us, Mr. McKay served as a law clerk for Judge William Bauer at the United
States Court of Appeals for the Seventh Circuit.
Michael S. Clark has been our Vice President – Finance and Controller since February 2011. Prior thereto, he served as our Assistant Controller since May
2008. Prior to joining our Company, he was the SEC Reporting Manager of FMC Technologies, Inc., a global provider of technology solutions for the energy
industry, from December 2004 to May 2008. Before joining FMC Technologies, Mr. Clark, a certified public accountant (inactive), worked in public accounting
for more than eight years, leaving as a Senior Manager in the audit practice of Deloitte & Touche.
Code of Ethics
A copy of our Code of Ethics, which is applicable to our principal executive officer, principal financial officer, and principal accounting officer, is
available free of charge through our website at www.lkqcorp.com. Any amendments to the elements of our Code of Ethics enumerated in paragraph (b) of Item 406
of Regulation S-K, or waivers granted to the above listed officers relating to such elements, will be posted on our website.
Section 16 Compliance
Information appearing under the caption "Delinquent Section 16(a) Reports" in the Proxy Statement is incorporated herein by reference.
Audit Committee
Information appearing under the caption "Corporate Governance—Committees of the Board—Audit Committee" in the Proxy Statement is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the captions "Director Compensation—Director Compensation Table," "Executive Compensation—Compensation
Discussion and Analysis," "Corporate Governance—Compensation Committee Interlocks and Insider Participation" and "Executive Compensation—
Compensation Tables" in the Proxy Statement is incorporated herein by reference.
133
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information appearing under the caption "Other Information—Principal Stockholders" in the Proxy Statement is incorporated herein by reference.
The following table provides information about our common stock that may be issued under our equity compensation plans as of December 31, 2019:
Plan Category
Equity compensation plans approved by stockholders
Stock options
Restricted stock units
Performance-based restricted stock units
Total equity compensation plans approved by stockholders
Equity compensation plans not approved by stockholders
Total
Equity Compensation Plan Information
Number of
securities to be issued
upon exercise of
outstanding options,
warrants, and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants, and rights
(b)
Number of securities remaining
available for future
issuance under equity
compensation plans (excluding
securities reflected in column (a))
(c)
114,594 $
1,612,026 $
136,170 $
1,862,790
— $
1,862,790
12.26
—
—
—
10,426,797
—
10,426,797
See Note 7, "Stock-Based Compensation," to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further
information related to the equity incentive plans listed above.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information appearing under the captions "Other Information—Certain Transactions," "Election of our Board of Directors" and "Corporate Governance—
Director Independence" in the Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information appearing under the captions "Ratification of Appointment of Our Independent Registered Public Accounting Firm—Audit Fees and Non-
Audit Fees" and "Ratification of Appointment of Our Independent Registered Public Accounting Firm—Policy on Audit Committee Approval of Audit and Non-
Audit Services" in the Proxy Statement is incorporated herein by reference.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
PART IV
Reference is made to the information set forth in Part II, Item 8 of this Annual Report on Form 10-K, which information is incorporated herein by
reference.
(a)(2) Financial Statement Schedules
Other than as set forth below, all schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted because
they are not required under the related instructions, are not applicable, or the information has been provided in the consolidated financial statements or the notes
thereto.
134
Schedule II—Valuation and Qualifying Accounts and Reserves
(in thousands)
Balance at
Beginning of
Period
Additions
Charged to
Costs and
Expenses
Deductions
Acquisitions
and Other
Balance at End
of Period
Description
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
Year ended December 31, 2019
$
57,207 $
12,088 $
(18,308) $
1,698 $
Year ended December 31, 2018
Year ended December 31, 2017
57,609
45,608
13,970
15,387
(15,945)
(13,012)
1,573
9,626
52,685
57,207
57,609
ALLOWANCE FOR ESTIMATED
RETURNS, DISCOUNTS &
ALLOWANCES: (1)
Year ended December 31, 2017
$
38,345 $
1,885,517 $
(1,884,250) $
2,713 $
42,325
(1) Subsequent to our adoption of ASC 606 in 2018, we present a refund liability and a returns asset within the Consolidated Balance Sheet, whereas in
periods prior to adoption, we presented the estimated margin impact of expected returns as a contra-asset within accounts receivable. See Note 5,
"Revenue Recognition," to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information.
135
(a)(3) Exhibits
The exhibits to this Annual Report on Form 10-K are listed in Item 15(b) of this Annual Report on Form 10-K. Included in the exhibits listed therein are
the following exhibits which constitute management contracts or compensatory plans or arrangements:
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.34
10.35
10.36
10.37
10.38
10.39
10.40
LKQ Corporation 401(k) Plus Plan dated August 1, 1999.
Amendment to LKQ Corporation 401(k) Plus Plan.
Trust for LKQ Corporation 401(k) Plus Plan.
LKQ Corporation 401(k) Plus Plan II, as amended and restated effective as of January 1, 2019.
LKQ Corporation 1998 Equity Incentive Plan, as amended.
Form of LKQ Corporation Restricted Stock Unit Agreement for Non-Employee Directors.
Form of LKQ Corporation Performance-Based Restricted Stock Unit Agreement (PSU 1 Award).
Form of LKQ Corporation Performance-Based Restricted Stock Unit Agreement (PSU 2 Award).
LKQ Corporation Cash Incentive Plan
Form of LKQ Corporation Annual Cash Bonus Award Memorandum
Form of LKQ Corporation Long-Term Cash Incentive Award Memorandum
Form of LKQ Corporation Performance-Based Restricted Stock Unit Agreement.
Form of Indemnification Agreement between directors and officers of LKQ Corporation and LKQ Corporation.
Amended and Restated LKQ Corporation Long Term Incentive Plan.
Form of LKQ Corporation Executive Officer Long Term Incentive Plan Award Memorandum.
Change of Control Agreement between LKQ Corporation and John S. Quinn dated as of July 24, 2014.
Change of Control Agreement between LKQ Corporation and Walter P. Hanley dated as of July 24, 2014.
Change of Control Agreement between LKQ Corporation and Victor M. Casini dated as of July 24, 2014.
Change of Control Agreement between LKQ Corporation and Michael S. Clark dated as of July 24, 2014.
Change of Control Agreement between LKQ Corporation and Dominick P. Zarcone dated as of March 30, 2015.
Change of Control Agreement between LKQ Corporation and Justin L. Jude dated as of May 13, 2015.
Change of Control Agreement between LKQ Corporation and Ashley T. Brooks dated as of May 2, 2016.
Change of Control Agreement between LKQ Corporation and Matthew J. McKay dated as of June 1, 2016.
Change of Control Agreement between LKQ Corporation and Varun Laroyia dated as of October 1, 2017.
Change of Control Agreement between LKQ Corporation and Arnd Franz dated as of October 1, 2019.
Change of Control Agreement between LKQ Corporation and Michael T. Brooks dated as of January 31, 2020.
LKQ Severance Policy for Key Executives.
Offer Letter to John S. Quinn dated February 12, 2015, as amended.
Services Agreement dated as of February 26, 2015 between LKQ Corporation and John S. Quinn.
Offer Letter to Dominick P. Zarcone dated February 12, 2015.
Memorandum dated as of May 25, 2017 from Joseph M. Holsten to Dominick P. Zarcone.
Offer letter to Varun Laroyia dated September 5, 2017.
Service Agreement between Euro Car Parts Limited and Sukhpal Singh Ahluwalia dated as of September 7, 2017.
Settlement Agreement among Euro Car Parts Limited, LKQ Corporation and Sukhpal Singh Ahluwalia dated as of January 2, 2019.
136
(b) Exhibits
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
Restated Certificate of Incorporation of LKQ Corporation (incorporated herein by reference to Exhibit 3.1 to the Company’s report on Form 10-Q
filed with the SEC on October 31, 2014).
Amended and Restated Bylaws of LKQ Corporation, as amended as of May 7, 2019 (incorporated herein by reference to Exhibit 3.1 to the
Company's report on Form 8-K filed with the SEC on May 8, 2019).
Specimen of common stock certificate (incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A,
Registration No. 333-107417 filed with the SEC on September 12, 2003).
Amendment and Restatement Agreement dated as of January 29, 2016 by and among LKQ Corporation, LKQ Delaware LLP, and certain
additional subsidiaries of LKQ Corporation, as borrowers, certain financial institutions, as lenders, and Wells Fargo Bank, National Association,
as administrative agent (incorporated herein by reference to Exhibit 4.1 to the Company's report on Form 8-K filed with the SEC on February 2,
2016).
Amendment No. 1 dated as of December 14, 2016 to the Fourth Amended and Restated Credit Agreement, which is Exhibit A to the Amendment
and Restatement Agreement dated as of January 29, 2016 by and among LKQ Corporation, LKQ Delaware LLP, and certain additional
subsidiaries of LKQ Corporation, as borrowers, certain financial institutions, as lenders, and Wells Fargo Bank, National Association, as
administrative agent (incorporated herein by reference to Exhibit 4.3 to the Company's report on Form 10-K filed with the SEC on February 27,
2017).
Amendment No. 2 dated as of December 1, 2017 to the Fourth Amended and Restated Credit Agreement, which is Exhibit A to the Amendment
and Restatement Agreement dated as of January 29, 2016 by and among LKQ Corporation, LKQ Delaware LLP, and certain additional
subsidiaries of LKQ Corporation, as borrowers, certain financial institutions, as lenders, and Wells Fargo Bank, National Association, as
administrative agent. (incorporated herein by reference to Exhibit 4.4 to the Company's report on Form 10-K filed with the SEC on February 28,
2018).
Amendment No. 3 dated as of November 20, 2018 to the Fourth Amended and Restated Credit Agreement, which is Exhibit A to the Amendment
and Restatement Agreement dated as of January 29, 2016 by and among LKQ Corporation, LKQ Delaware LLP, and certain additional
subsidiaries of LKQ Corporation, as borrowers, certain financial institutions, as lenders, and Wells Fargo Bank, National Association, as
administrative agent (incorporated herein by reference to Exhibit 4.5 to the Company's report on Form 10-K filed with the SEC on March 1,
2019).
Indenture dated as of May 9, 2013 among LKQ Corporation, as Issuer, the Guarantors, and U.S. Bank National Association, as Trustee
(incorporated herein by reference to Exhibit 4.1 to the Company's report on Form 8-K filed with the SEC on May 10, 2013).
Supplemental Indenture dated as of May 8, 2014 among LKQ Corporation, as Issuer, the Guarantors, and U.S. Bank National Association, as
Trustee (incorporated herein by reference to Exhibit 4.1 to the Company’s report on Form 10-Q filed with the SEC on August 1, 2014).
Supplemental Indenture dated as of September 9, 2016 among LKQ Corporation, as Issuer, certain subsidiaries of LKQ Corporation, as
Guarantors, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.11 to the Company's report on Form
10-K filed with the SEC on February 27, 2017).
Supplemental Indenture dated as of July 20, 2017 among LKQ Corporation, as Issuer, certain subsidiaries of LKQ Corporation, as Guarantors,
and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.8 to the Company's report on Form 10-K filed with
the SEC on February 28, 2018).
Supplemental Indenture dated as of November 29, 2017 among LKQ Corporation, as Issuer, certain subsidiaries of LKQ Corporation, as
Guarantors, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.9 to the Company's report on Form 10-
K filed with the SEC on February 28, 2018).
Supplemental Indenture dated as of April 6, 2018 among LKQ Corporation, as Issuer, certain subsidiaries of LKQ Corporation, as Guarantors,
and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.2 to the Company's report on Form 10-Q filed with
the SEC on May 7, 2018).
Supplemental Indenture dated as of July 12, 2018 among LKQ Corporation, as Issuer, certain subsidiaries of LKQ Corporation, as Guarantors,
and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.4 to the Company's report on Form 10-Q filed with
the SEC on August 6, 2018).
Indenture dated as of April 14, 2016 among LKQ Italia Bondco S.p.A., as Issuer, LKQ Corporation, certain subsidiaries of LKQ Corporation, the
Trustee, and the Paying Agent, Transfer Agent and Registrar (incorporated herein by reference to Exhibit 4.1 to the Company’s report on Form 8-
K filed with the SEC on April 18, 2016).
Supplemental Indenture dated as of June 13, 2016 among Auto Kelly a.s., LKQ Corporation, LKQ Italia Bondco S.p.A. and the Trustee
(incorporated herein by reference to Exhibit 4.2 to the Company’s report on Form 10-Q filed with the SEC on August 2, 2016).
Supplemental Indenture dated as of June 13, 2016 among ELIT CZ, spol. s r.o., LKQ Corporation, LKQ Italia Bondco S.p.A. and the Trustee
(incorporated herein by reference to Exhibit 4.3 to the Company’s report on Form 10-Q filed with the SEC on August 2, 2016).
137
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
4.26
4.27
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Supplemental Indenture dated as of June 13, 2016 among Rhiag-Inter Auto Parts Italia S.p.A., LKQ Corporation, LKQ Italia Bondco S.p.A. and
the Trustee (incorporated herein by reference to Exhibit 4.4 to the Company’s report on Form 10-Q filed with the SEC on August 2, 2016).
Supplemental Indenture dated as of June 13, 2016 among Bertolotti S.p.A., LKQ Corporation, LKQ Italia Bondco S.p.A. and the Trustee
(incorporated herein by reference to Exhibit 4.5 to the Company’s report on Form 10-Q filed with the SEC on August 2, 2016).
Supplemental Indenture dated as of September 9, 2016 among LKQ Italia Bondco S.p.A., as Issuer, certain subsidiaries of LKQ Corporation, as
Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.2 to the Company’s report
on Form 10-Q filed with the SEC on November 1, 2016).
Supplemental Indenture dated as of July 24, 2017 among LKQ Italia Bondco S.p.A., as Issuer, certain subsidiaries of LKQ Corporation, as
Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.16 to the Company's report
on Form 10-K filed with the SEC on February 28, 2018).
Supplemental Indenture dated as of November 29, 2017 among LKQ Italia Bondco S.p.A., as Issuer, certain subsidiaries of LKQ Corporation, as
Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.17 to the Company's report
on Form 10-K filed with the SEC on February 28, 2018).
Supplemental Indenture dated as of April 27, 2018 among LKQ Italia Bondco S.p.A., as Issuer, certain subsidiaries of LKQ Corporation, as
Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.3 to the Company's report
on Form 10-Q filed with the SEC on August 6, 2018).
Supplemental Indenture dated as of July 16, 2018 among LKQ Italia Bondco S.p.A., as Issuer, certain subsidiaries of LKQ Corporation, as
Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.5 to the Company's report
on Form 10-Q filed with the SEC on August 6, 2018).
Indenture dated as of April 9, 2018 among LKQ European Holdings B.V., as Issuer, LKQ Corporation, certain subsidiaries of LKQ Corporation,
the trustee, paying agent, transfer agent, and registrar (incorporated herein by reference to Exhibit 4.1 to the Company's report on Form 8-K filed
with the SEC on April 12, 2018).
Supplemental Indenture dated as of July 16, 2018 among LKQ European Holdings B.V., as Issuer, LKQ Corporation, certain subsidiaries of LKQ
Corporation, as Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.6 to the
Company's report on Form 10-Q filed with the SEC on August 6, 2018).
Supplemental Indenture dated as of June 21, 2019 among LKQ Italia Bondco S.p.A, as Issuer, certain subsidiaries of LKQ Corporation, as
Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Company's report
on Form 10-Q filed with the SEC on August 2, 2019).
Supplemental Indenture dated as of June 21, 2019 among LKQ European Holdings B.V., as Issuer, LKQ Corporation, certain subsidiaries of LKQ
Corporation, as Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.2 to the
Company's report on Form 10-Q filed with the SEC on August 2, 2019).
Description of the Company's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.
LKQ Corporation 401(k) Plus Plan dated August 1, 1999 (incorporated herein by reference to Exhibit 10.23 to the Company’s Registration
Statement on Form S-1, Registration No. 333-107417 filed with the SEC on July 28, 2003).
Amendment to LKQ Corporation 401(k) Plus Plan (incorporated herein by reference to Exhibit 10.24 to the Company’s Registration Statement on
Form S-1, Registration No. 333-107417 filed with the SEC on July 28, 2003).
Trust for LKQ Corporation 401(k) Plus Plan (incorporated herein by reference to Exhibit 10.25 to the Company’s Registration Statement on
Form S-1, Registration No. 333-107417 filed with the SEC on July 28, 2003).
LKQ Corporation 401(k) Plus Plan II, as amended and restated effective as of January 1, 2019 (incorporated herein by reference to Exhibit 10.4 to
the Company's report on Form 10-K filed with the SEC on March 1, 2019).
LKQ Corporation 1998 Equity Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 10-
Q filed with the SEC on November 1, 2016).
Form of LKQ Corporation Restricted Stock Unit Agreement for Non-Employee Directors.
Form of LKQ Corporation Performance-Based Restricted Stock Unit Agreement (PSU 1 Award).
Form of LKQ Corporation Performance-Based Restricted Stock Unit Agreement (PSU 2 Award).
LKQ Corporation Cash Incentive Plan (incorporated herein by reference to Exhibit 10.6 to the Company’s report on Form 10-Q filed with the
SEC on May 2, 2019).
138
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
Form of LKQ Corporation Annual Cash Bonus Award Memorandum.
Form of LKQ Corporation Long-Term Cash Incentive Award Memorandum.
Form of LKQ Corporation Performance-Based Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10.9 to the
Company's report on Form 10-K filed with the SEC on February 28, 2018).
Form of Indemnification Agreement between directors and officers of LKQ Corporation and LKQ Corporation (incorporated herein by reference
to Exhibit 10.30 to the Company’s Registration Statement on Form S-1, Registration No. 333-107417 filed with the SEC on July 28, 2003).
Amended and Restated LKQ Corporation Long Term Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s report on
Form 8-K filed with the SEC on November 7, 2014).
Form of LKQ Corporation Executive Officer Long Term Incentive Plan Award Memorandum (incorporated herein by reference to Exhibit 10.15
to the Company's report on Form 10-K filed with the SEC on March 1, 2019).
Change of Control Agreement between LKQ Corporation and John S. Quinn dated as of July 24, 2014 (incorporated herein by reference to
Exhibit 10.3 to the Company’s report on Form 8-K filed with the SEC on July 28, 2014).
Change of Control Agreement between LKQ Corporation and Walter P. Hanley dated as of July 24, 2014 (incorporated herein by reference to
Exhibit 10.4 to the Company’s report on Form 8-K filed with the SEC on July 28, 2014).
Change of Control Agreement between LKQ Corporation and Victor M. Casini dated as of July 24, 2014 (incorporated herein by reference to
Exhibit 10.5 to the Company’s report on Form 8-K filed with the SEC on July 28, 2014).
Change of Control Agreement between LKQ Corporation and Michael S. Clark dated as of July 24, 2014 (incorporated herein by reference to
Exhibit 10.8 to the Company’s report on Form 8-K filed with the SEC on July 28, 2014).
Change of Control Agreement between LKQ Corporation and Dominick P. Zarcone dated as of March 30, 2015 (incorporated herein by reference
to Exhibit 10.7 to the Company’s report on Form 10-Q filed with the SEC on May 1, 2015).
Change of Control Agreement between LKQ Corporation and Justin L. Jude dated as of May 13, 2015 (incorporated herein by reference to
Exhibit 10.32 to the Company’s report on Form 10-K filed with the SEC on February 25, 2016).
Change of Control Agreement between LKQ Corporation and Ashley T. Brooks dated as of May 2, 2016 (incorporated herein by reference to
Exhibit 10.1 to the Company’s report on Form 10-Q filed with the SEC on August 2, 2016).
Change of Control Agreement between LKQ Corporation and Matthew J. McKay dated as of June 1, 2016 (incorporated herein by reference to
Exhibit 10.34 to the Company's report on Form 10-K filed with the SEC on February 27, 2017).
Change of Control Agreement between LKQ Corporation and Varun Laroyia dated as of October 1, 2017 (incorporated herein by reference to
Exhibit 10.26 to the Company's report on Form 10-K filed with the SEC on February 28, 2018).
Change of Control Agreement between LKQ Corporation and Arnd Franz dated as of October 1, 2019.
Change of Control Agreement between LKQ Corporation and Michael T. Brooks dated as of January 31, 2020.
LKQ Severance Policy for Key Executives (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 8-K filed with the
SEC on July 28, 2014).
Receivables Sale Agreement dated as of September 28, 2012 among Keystone Automotive Industries, Inc., as an Originator, Greenleaf Auto
Recyclers, LLC, as an Originator, and LKQ Receivables Finance Company, LLC, as Buyer (incorporated herein by reference to Exhibit 10.1 to
the Company’s report on Form 8-K filed with the SEC on October 4, 2012).
Receivables Purchase Agreement dated as of September 28, 2012 among LKQ Receivables Finance Company, LLC, as Seller, LKQ Corporation,
as Servicer, Victory Receivables Corporation, as a Conduit and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as a Financial Institution, as
Administrative Agent and as a Managing Agent (incorporated herein by reference to Exhibit 10.2 to the Company’s report on Form 8-K filed with
the SEC on October 4, 2012).
Amendment No. 1 to Receivables Purchase Agreement dated as of September 29, 2014 among LKQ Receivables Finance Company, LLC, as
Seller, LKQ Corporation, as Servicer, Victory Receivables Corporation, as a Conduit and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as a Financial
Institution, as Administrative Agent and as a Managing Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form
8-K filed with the SEC on October 3, 2014).
139
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
21.1
23.1
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
Performance Undertaking, dated as of September 28, 2012 by LKQ Corporation in favor of LKQ Receivables Finance Company, LLC
(incorporated herein by reference to Exhibit 10.3 to the Company’s report on Form 8-K filed with the SEC on October 4, 2012).
Amendment No. 2 to Receivables Purchase Agreement dated as of November 29, 2016 among LKQ Receivables Finance Company, LLC, as
Seller, LKQ Corporation, as Servicer, Victory Receivables Corporation, as a Conduit, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., a Financial
Institution, as Administrative Agent and as a Managing Agent (incorporated herein by reference to Exhibit 10.40 to the Company's report on
Form 10-K filed with the SEC on February 27, 2017).
Amendment No. 3 to Receivables Purchase Agreement dated as of December 20, 2018 among LKQ Receivables Finance Company, LLC, as
Seller, LKQ Corporation, as Servicer, Victory Receivables Corporation, as a Conduit, MUFG Bank, a Financial Institution as Administrative
Agent and as a Managing Agent (incorporated herein by reference to Exhibit 10.31 to the Company's report on Form 10-K filed with the SEC on
March 1, 2019).
Offer Letter to John S. Quinn dated February 12, 2015, as amended (incorporated herein by reference to Exhibit 10.41 to the Company’s report on
Form 10-K filed with the SEC on February 25, 2016).
Services Agreement dated as of February 26, 2015 between LKQ Corporation and John S. Quinn (incorporated herein by reference to Exhibit
10.3 to the Company’s report on Form 8-K filed with the SEC on March 3, 2015).
Offer Letter to Dominick P. Zarcone dated February 12, 2015 (incorporated herein by reference to Exhibit 10.4 to the Company’s report on Form
8-K filed with the SEC on March 3, 2015).
Memorandum dated as of May 25, 2017 from Joseph M. Holsten to Dominick P. Zarcone (incorporated herein by reference to Exhibit 10.1 to the
Company's report on Form 8-K filed with the SEC on June 5, 2017).
Offer letter to Varun Laroyia dated September 5, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company's report on Form 8-K
filed with the SEC on September 6, 2017).
Service Agreement between Euro Car Parts Limited and Sukhpal Singh Ahluwalia dated as of September 7, 2017 (incorporated herein by
reference to Exhibit 10.1 to the Company's report on Form 8-K filed with the SEC on September 13, 2017).
Settlement Agreement among Euro Car Parts Limited, LKQ Corporation and Sukhpal Singh Ahluwalia dated as of January 2, 2019 (incorporated
herein by reference to Exhibit 10.40 to the Company's report on Form 10-K filed with the SEC on March 1, 2019).
List of subsidiaries, jurisdictions and assumed names.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
140
ITEM 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on February 27, 2020.
LKQ CORPORATION
By:
/s/ DOMINICK ZARCONE
Dominick Zarcone
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on February 27, 2020.
Principal Executive Officer:
Signature
Title
/s/ DOMINICK ZARCONE
President and Chief Executive Officer
Dominick Zarcone
Principal Financial Officer:
/s/ VARUN LAROYIA
Varun Laroyia
Principal Accounting Officer:
Executive Vice President and Chief Financial Officer
/s/ MICHAEL S. CLARK
Vice President—Finance and Controller
Michael S. Clark
A Majority of the Directors:
/s/ A. CLINTON ALLEN
A. Clinton Allen
/s/ PATRICK BERARD
Patrick Berard
/s/ MEG ANN DIVITTO
Meg Ann Divitto
/s/ ROBERT M. HANSER
Robert M. Hanser
/s/ JOSEPH M. HOLSTEN
Joseph M. Holsten
/s/ BLYTHE J. MCGARVIE
Blythe J. McGarvie
/s/ JOHN W. MENDEL
John W. Mendel
/s/ JODY G. MILLER
Jody G. Miller
/s/ JOHN F. O'BRIEN
John F. O'Brien
/s/ GUHAN SUBRAMANIAN
Guhan Subramanian
/s/ XAVIER URBAIN
Xavier Urbain
/s/ WILLIAM M. WEBSTER, IV
William M. Webster, IV
/s/ DOMINICK ZARCONE
Dominick Zarcone
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
141
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.27
As of December 31, 2019, LKQ Corporation has one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”): our Common Stock.
We are authorized to issue up to 1,000,000,000 shares of common stock. Each share has a par value of $0.01. The following description summarizes
various provisions of our common stock. The summary is not complete and is subject to, and qualified in its entirety by, our restated certificate of incorporation
and amended and restated bylaws, copies of which have been filed as exhibits to our most recent annual report on Form 10-K, and the provisions of applicable
Delaware law.
DESCRIPTION OF COMMON STOCK
Common Stock
Each share of our common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. The
holders of common stock are entitled to receive dividends, if any, declared from time to time by the directors out of legally available funds. The payment of
dividends is restricted by the terms of our credit facility. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to
share ratably in all assets remaining after the payment of liabilities.
The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are fully paid and nonassessable.
Anti-Takeover Effects of Our Certificate of Incorporation and Bylaws
Some provisions of our restated certificate of incorporation and amended and restated bylaws may be deemed to have an anti-takeover effect and may
delay or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interest. These provisions include:
Special Meetings of Stockholders
Our restated certificate of incorporation provides that special meetings of our stockholders may be called only by the president or by a majority of the
board of directors. As a result, stockholders must rely on the board of directors to call a special meeting or wait until the next annual meeting to hold a vote on
extraordinary matters like a significant transaction and would have to comply with the notice provisions described below. The restriction on the ability of
stockholders to call a special meeting means that a proposal to replace the board also could be delayed until the next annual meeting.
Advance Notice Procedure
Our amended and restated bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our
stockholders, including proposed nominations of persons for election to the board of directors. Generally, the advance notice provisions require that written notice
of the proposals or nominations must be given to our secretary no less than 60 days nor more than 90 days prior to the annual meeting. However, if notice or prior
public disclosure of the annual meeting date is given less than 70 days prior to the meeting, the notice must be received by our secretary no later than the close of
business on the tenth day following the day on which notice of the annual meeting date was mailed or public disclosure was made, whichever occurs first.
At an annual meeting, stockholders may only consider proposals or nominations specified in the notice of meeting, brought before the meeting by or at
the direction of the board of directors, or brought before the meeting by a stockholder who has complied with the notice provisions described above. Our amended
and restated bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed. These provisions may
also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain
control of us.
No Stockholder Action by Written Consent
Delaware law provides that stockholders may take action by written consent in lieu of a stockholder meeting. However, Delaware law also allows us to
eliminate stockholder actions by written consent, which we have done. Elimination of written consents of stockholders may lengthen the amount of time required
to take stockholder actions because actions by written consent are not subject to the minimum notice requirement of a stockholders’ meeting. The elimination of
stockholders’ written consents may also deter hostile takeover attempts. Without the availability of stockholders’ actions by written consent, a holder controlling a
majority of our capital stock would not be able to amend our bylaws or remove directors without holding a
Exhibit 4.27
stockholders meeting. The holder would have to obtain the consent of a majority of the board of directors to call a special stockholders’ meeting or comply with the
notice periods applicable to annual meetings.
Authorized but Unissued Shares
The authorized but unissued shares of common stock will be available for future issuance without stockholder approval. These additional shares may be
utilized for a variety of corporate purposes, including public offerings to raise additional capital, acquisitions and employee benefit plans. The existence of
authorized but unissued shares of common stock could render more difficult or discourage an attempt to obtain control of a majority of our stock by means of a
proxy contest, tender offer, merger or otherwise.
Material Provisions of Delaware Law
We are subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, such provisions prohibit a publicly-held Delaware
corporation from engaging in any business combination transactions with any interested stockholder for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless:
•
•
•
the transaction is approved by the board of directors prior to the date the interested stockholder obtained that status;
upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares of
voting stock outstanding those shares owned by (a) persons who are directors and also officers and (b) employee stock plans in which employee
participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
on or subsequent to the date the person became an interested stockholder, the business combination is approved by the board of directors and authorized at
an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder.
A “business combination” is defined to include mergers, asset sales and other transactions resulting in financial benefit to an interested stockholder. In
general, an “interested stockholder” is a person who, together with affiliates and associates, owns, or at any time in the previous three years owned, 15% or more of
a corporation’s voting stock. The statute could have the effect of prohibiting or delaying mergers or other takeover or change in control attempts.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Broadridge Corporate Issuer Solutions, Inc. Its address is 1717 Arch Street, Suite 1300,
Philadelphia, Pennsylvania 19103.
Listing
Our common stock is listed on Nasdaq under the symbol “LKQ.”
RESTRICTED STOCK UNIT AGREEMENT
Exhibit 10.6
This Restricted Stock Unit Agreement (this “Agreement”) is made and entered into as of the _____ day of ______________,
and
Date”) by and between LKQ Corporation,
a Delaware corporation (the “Company”),
_______ (the “Grant
_____________________________ (the “Key Person”).
Recitals
The Board is of the opinion that the interests of the Company will be advanced by encouraging certain persons affiliated
with the Company, upon whose judgment, initiative and efforts the Company depends for the successful conduct of the Company’s
business, to acquire or increase their proprietary interest in the Company, thus providing them with a more direct stake in its
welfare and assuring a closer identification of their interests with those of the Company.
The Board is of the opinion that the Key Person is such a person.
The Company desires to grant restricted stock units (“RSUs”) to the Key Person, and the Key Person desires to accept such
grant, all on the terms and subject to the conditions set forth in this Agreement and set forth in the Company’s 1998 Equity
Incentive Plan (the “Plan”). Any capitalized term used herein that is not defined shall have the meaning of such term set forth in the
Plan.
Covenants
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:
1.
Grant of Restricted Stock Units. The Company hereby grants to the Key Person and the Key Person hereby accepts
from the Company ________ RSUs, on the terms and subject to the conditions set forth herein and in the Plan (the “Award”).
2.
Representations of Key Person. The Key Person hereby represents and warrants that the Key Person has been
provided a copy of the Plan (which is also filed publicly) and a Plan prospectus describing the material terms of the Plan, and is
accepting the RSUs with full knowledge of and subject to the restrictions contained in this Agreement and the Plan.
3.
Vesting and Settlement. (a) The RSUs shall be subject to time-based vesting conditions (which must be satisfied
before the applicable portion of the Award is considered earned and payable) as follows: the Award shall vest with respect to 100%
of the number of RSUs subject to the Award on the earlier of (i) May 6, 2020 (unless such date is a day on which the U.S. stock
exchanges are closed, in which case the vesting date shall be extended to the next succeeding business day), and (ii) the date of the
2020 Annual Meeting of the Stockholders of the Company (the “Vesting Period”).
(b) Within 30 days of vesting, one Share shall be delivered to the Key Person in settlement of each vested RSU.
4.
Termination of Relationship. In the event the Key Person incurs a Separation from Service for any reason other than
death or Disability, all RSUs of such Key Person that are unvested at the date of Separation from Service shall be forfeited to the
Company. In the event the Key Person incurs a Separation from Service due to death or Disability, all RSUs of such Key Person
shall immediately become fully vested on the date of termination and all restrictions shall lapse.
5.
Change of Control. In the event of a Change of Control occurring after the Grant Date, the
Change of Control provisions of Article 14 of the Plan shall apply to the RSUs.
6.
Non-Transferability of RSUs. Except as expressly provided in the Plan or this Agreement, the RSUs may not be
sold, assigned, transferred, pledged or otherwise disposed of, shall not be assignable by operation of law, and shall not be subject to
execution, attachment or similar process, except by will or the laws of descent and distribution. Any attempted sale, assignment,
transfer, pledge or other disposition of any RSU prior to vesting shall be null and void and without effect.
7.
Taxes. The Key Person shall be responsible for taxes due upon the settlement of any RSU granted hereunder and
upon any later transfer by the Key Person of any Share received upon the settlement of an RSU.
8.
No Rights as a Stockholder. Prior to the settlement of any RSU, the Key Person has no rights with respect to the
Share issuable to the Key Person upon such settlement, shall not be treated as a Stockholder, and shall not have any voting rights or
the right to receive any dividends with respect to the RSU or the underlying Share.
9.
Notices. Any notices required or permitted hereunder shall be sent using
any means (including personal delivery, courier, messenger service, facsimile transmission or electronic transmission), if
to the Key Person, at the address as the Key Person may designate in writing to the Company or to the Key Person’s home address
if no other address has been provided to the Company; and, if to the Company, at the address of its headquarters in Chicago,
Attention: General Counsel, or such other address as the Company may designate in writing to the Key Person. Such notice shall
be deemed duly given when it is actually received by the party for whom it was intended. The Company may deliver any
documents related to current or future participation in the Plan by electronic means and the Key Person’s acceptance of the Award
constitutes the Key Person’s consent to receive those documents by electronic delivery and to participate in the Plan through any
on-line or electronic system established and maintained by the Company or a third party designated by the Company.
10.
Failure to Enforce Not a Waiver. The failure of the Company to enforce at any time any provision of this
Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.
11.
Amendment or Termination. This Agreement may not be amended or terminated unless such amendment or
termination is in writing and duly executed by each of the parties hereto.
12.
Benefit and Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the Company,
its successors and assigns, and the Key Person and the Key Person’s executors, administrators, personal representatives and heirs.
In the event that any part of this Agreement shall be held to be invalid or unenforceable, the remaining parts hereof shall
nevertheless continue to be valid and enforceable as though the invalid portions were not a part hereof.
13.
Entire Agreement. This Agreement contains the entire understanding of the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements, discussions and understandings relating to such subject matter; provided,
however, for the avoidance of doubt, the parties acknowledge that any confidentiality, non-competition, non-solicitation or similar
restrictive covenant agreed to by the parties hereto on or before the Grant Date is not superseded by this Agreement and is an
obligation of the parties hereto in addition to Section 17 below.
14.
Governing Law and Venue. This Agreement shall be governed by, and construed and enforced in accordance with,
the laws of the State of Delaware, without giving effect to principles and provisions thereof relating to conflict or choice of laws.
Any and all actions concerning any dispute arising hereunder shall be filed and maintained only in a state or federal court sitting in
the County of Cook, State of Illinois. The parties hereto specifically consent and submit to the jurisdiction of such court.
15.
Incorporation of Terms of Plan. The terms of the Plan are incorporated herein by reference and the Key Person’s
rights hereunder are subject to the terms of the Plan to the extent they are inconsistent with or in addition to the terms set forth
herein. The Key Person hereby agrees to comply with all requirements of the Plan.
16.
Non-Competition and Confidentiality. (a) Notwithstanding any provision to the contrary set forth elsewhere herein,
the RSUs, the Shares underlying the RSUs, and any proceeds received by the Key Person upon the sale of Shares underlying the
RSUs shall be forfeited by the Key Person to the Company without any consideration therefore, if the Key Person is not in
compliance, at any time during the period commencing on the Grant Date and ending nine months following the Key Person’s
Separation from Service, with all applicable provisions of the Plan and with the following conditions:
(i)
the Key Person shall not directly or indirectly (1) be employed by, engage or have any interest in any
business which is or becomes competitive with the Company or its Subsidiaries or is or becomes otherwise prejudicial to or
in conflict with the interests of the Company or its Subsidiaries, (2) induce any customer of the Company or its Subsidiaries
to patronize such competitive business or otherwise request or advise any such customer to withdraw, curtail or cancel any
of its business with the Company or its Subsidiaries, or (3) hire or solicit for employment any person employed by the
Company or its Subsidiaries or hire any person who was employed by the Company or its Subsidiaries at any time within
nine months of such hire; provided, however, that this restriction shall not prevent the Key Person from acquiring and
holding up to two percent of the outstanding shares of capital stock of any corporation which is or becomes competitive with
the Company or is or becomes otherwise prejudicial to or in conflict with the interests of the Company if such shares are
available to the general public on a national securities exchange or in the over-the-counter market; and
(ii)
the Key Person shall not use or disclose, except for the sole benefit of or with the written consent of the
Company, any confidential information relating to the business, processes or products of the Company. Nothing in this
Agreement, however, prohibits the Key Employee from reporting violations of law or regulation to any U.S. federal, state or
local governmental or law enforcement branch, agency or entity (collectively, a “Governmental Entity”), or from
cooperating with any Governmental Entity, including the EEOC, the Securities and Exchange Commission or the
Department of Justice.
(b) The Company shall notify in writing the Key Person of any violation by the Key Person of this Section 16. The
forfeiture shall be effective as of the date of the occurrence of any of the activities set forth in Section 16(a) above. If the Shares
underlying the RSUs have been sold, the Key Person shall promptly pay to the Company the amount of the proceeds from such
sale. The Key Person hereby consents to a deduction from any amounts owed by the Company to the Key Person from time to time
(including amounts owed as wages or other compensation, fringe benefits or vacation pay) to the extent of the amounts owed by the
Key Person to the Company under this Section 16. Whether or not the Company elects to make any set-off in whole or in part, the
Key Person agrees to timely pay any amounts due under this Section 16. In addition, the Company shall be entitled to injunctive
relief for any violation by the Key Person of this Section 16.
(c) Notwithstanding any provision of this Agreement to the contrary, the Key Person shall be entitled to communicate,
cooperate and file a complaint with any Governmental Entity concerning possible violations of any U.S. federal, state or local law
or regulation, and to otherwise make disclosures to any Governmental Entity, in each case, that are protected under the
whistleblower provisions of any such law or regulation, as long as in each case the communications and disclosures are consistent
with applicable law. The Key Person shall not forfeit any RSUs, Shares held in connection with any RSUs or proceeds from the sale
of such Shares as a result of exercising any rights under this Section 16(c).
(d) The obligations of this Section 16 shall survive the Key Person’s Separation from Service.
17.
Hedging Positions. The Key Person agrees that, at any time during the period commencing on the Grant Date and
ending when the Award is fully settled or the RSUs are forfeited, the Key Person shall not (a) directly or indirectly sell any equity
security of the Company if the Key Person does not own the security sold, or if owning the security, does not deliver it against such
sale within 20 days thereafter; or (b) establish a derivative security position with respect to any equity security of the Company that
increases in value as the value of the underlying equity decreases (including a long put option and a short call option position) with
securities underlying the position exceeding the underlying securities otherwise owned by the Key Person. In the event the Key
Person violates this provision, the Company shall have the right to cancel the Award.
18.
Code Section 409A. The RSUs are intended to be exempt from (or in the alternative to comply with) Code Section
409A. This Agreement shall be construed and interpreted in a manner consistent with the requirements for avoiding taxes or
penalties under Code Section 409A, consistent with Section 18.6 of the Plan. For purposes of Code Section 409A, each installment
payment under this Agreement or the Plan, or otherwise payable to the Key Employee, shall be treated as a separate payment.
Notwithstanding the foregoing, neither the Company nor the Committee shall have any obligation to take any action to prevent the
assessment of any additional tax or penalty on the Key Employee under Code Section 409A and neither the Company nor the
Committee shall have any liability to the Key Employee for such tax or penalty.
19.
Clawback. The Award and all amounts and benefits received or outstanding under the Plan shall be subject to
potential clawback, cancellation, recoupment, rescission, payback, reduction or other similar action in accordance with the terms
and conditions of any applicable Company clawback or similar policy or any applicable law related to such actions, as may be in
effect from time to time. The Key Person’s acceptance of the Award constitutes the Key Person’s acknowledgement of and consent
to the Company’s application, implementation and enforcement of any applicable Company clawback or similar policy that may
apply to the Key Person, whether adopted before or after the Grant Date, and any provision of applicable law relating to clawback,
cancellation, recoupment, rescission, payback or reduction of compensation, and the Key Person’s agreement that the Company
may take such actions as may be necessary to effectuate any such policy or applicable law, without further consideration or action.
20.
Dividend Equivalents. If a dividend is paid with respect to the Common Stock, a dividend equivalent equal to the
total dividend the Key Person would have received had the RSUs been actual Shares shall be accumulated and deemed reinvested in
additional RSUs, which shall become earned and payable to the same extent that the underlying RSUs become earned and payable.
If the underlying RSUs are forfeited, the Key Person shall have no right to such dividend equivalents. Reinvestment of dividend
equivalents in additional RSUs at the time of any dividend payment and the payment of Shares with respect to dividend equivalents
shall only be permissible if sufficient Shares are available under the Plan for such
reinvestment or payment (taking into account then-outstanding Awards). In the event that sufficient Shares are not available for
such reinvestment or payment, such reinvestment or payment shall be made in the form of a grant of RSUs equal in number to the
Shares that would have been obtained by such payment or reinvestment, the terms of which RSUs shall provide for settlement in
cash and for dividend equivalent reinvestment in further RSUs on the terms contemplated by this Section.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the Grant Date.
LKQ CORPORATION KEY PERSON
By: __________________________ By: __________________________
Name:___________________________ Name: _______________________
Title: ____________________________ Address:______________________
Exhibit 10.7
PERFORMANCE-BASED RESTRICTED STOCK UNIT AGREEMENT
(PSU 1 AWARD)
LKQ CORPORATION 1998 EQUITY INCENTIVE PLAN (as amended as of August 8, 2016)
This Performance-Based Restricted Stock Unit Agreement (this “Agreement”) is made and entered into as of the [[DAY]] day of
[[MONTH]] [[YEAR]] (the “Grant Date”) by and between LKQ Corporation, a Delaware corporation (the “Company”), and
[[FIRSTNAME]] [[LASTNAME]] (the “Key Person”).
Recitals
The Board is of the opinion that the interests of the Company will be advanced by encouraging certain persons affiliated with the
Company, upon whose judgment, initiative and efforts the Company depends for the successful conduct of the Company’s business, to
acquire or increase their proprietary interest in the Company, thus providing them with a more direct stake in its welfare and assuring a closer
identification of their interests with those of the Company.
The Board is of the opinion that the Key Person is such a person.
The Company desires to grant performance-based RSUs to the Key Person, and the Key Person desires to accept such grant, all on
the terms and subject to the conditions set forth in this Agreement and set forth in the Company’s 1998 Equity Incentive Plan (the “Plan”).
Any capitalized term used herein that is not defined shall have the meaning of such term set forth in the Plan.
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:
Covenants
Grant of PSUs. The Company hereby grants to the Key Person and the Key Person hereby accepts from the Company
1.
[[SHARESGRANTED]] performance-based RSUs (“PSUs”), on the terms and subject to the conditions set forth herein and in the
Plan (the “Award”).
2.
Representations of Key Person. The Key Person hereby represents and warrants that the Key Person has been provided a
copy of the Plan (which is also filed publicly) and a Plan prospectus describing the material terms of the Plan, and is accepting the PSUs with
full knowledge of and subject to the restrictions contained in this Agreement and the Plan.
3.
Vesting and Settlement. (a) The Award shall be subject to two vesting conditions. Except as otherwise provided in this
Agreement, the Award will be considered earned and payable only to the extent that both vesting conditions are satisfied.
(i) Time-Based Vesting. The Award will vest over time as follows: 16.67% of the number of PSUs subject to the Award
(rounded to the nearest whole Share) will vest on [[FIRSTVESTINGDATE]] and each six-month anniversary thereof (unless such vesting
date is a day on which the U.S. stock exchanges are closed, in which case the vesting date shall be extended to the next succeeding business
day), subject to the Key Person’s continued Service through the applicable vesting date.
(ii) Performance-Based Vesting. The Award will also only vest upon written certification by the Committee of positive fully-
diluted earnings per share (“EPS”) of the Company (subject to adjustment for certain extraordinary items) for any of the Company’s first five
fiscal years ending after the Grant Date. If and when the performance-based condition is met, all PSUs that had previously met the time-based
vesting condition shall become earned and payable immediately and the remaining PSUs shall become earned and payable according to the
remaining schedule of the time-based condition. If the performance-based condition is not met, all PSUs shall be forfeited.
For purposes of determining EPS of the Company in any particular fiscal year, EPS shall be increased to the extent that EPS was
reduced in accordance with generally accepted accounting principles (“GAAP”) by objectively determinable amounts due to:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
A change in accounting policy or GAAP;
Dispositions of assets or businesses;
Asset impairments;
Amounts incurred in connection with any financing;
Losses on interest rate swaps resulting from mark to market adjustments or discontinuing hedges;
Board-approved restructuring, acquisition, or similar charges, including charges in conjunction with or in anticipation of an
acquisition;
Losses (and related fees and expenses) related to extraordinary environmental, legal, product liability or other contingencies;
Changes in tax laws or regulations or interpretations of such laws or regulations;
A Board-approved divestiture of a material business (i.e., the performance goals shall be adjusted to account for the
divestiture, including, if appropriate, the pro-rata effect of targeted improvements);
Changes in contingent consideration liabilities;
Losses from discontinued operations;
The imposition of tariffs or taxes on the importation of inventory;
Amortization expense related to acquired intangible assets; and
Other extraordinary, unusual, or infrequently occurring items as specifically disclosed in the Company’s financial statements
or filings under the Securities Exchange Act of 1934.
(b) Within 30 days of the satisfaction of both the time-based vesting condition and the performance-based vesting condition, one
Share shall be delivered to the Key Person in settlement of each vested PSU.
4.
incurs a Separation from Service prior to the end of the Performance Period, the Award shall be forfeited to the Company.
Separation from Service. (a) Except as otherwise provided in this Section 4 and Section 5, in the event the Key Person
(b) In the event the Key Person incurs a Separation from Service due to death or Disability before the end of the Performance
Period, the PSUs shall immediately become fully vested.
(c) In the event the Key Person incurs a Separation from Service due to Retirement, the Key Person shall continue to vest in the
PSUs subject to all the terms of this Agreement (including the performance-based vesting conditions), except that the Service requirement
will not apply and the Award will be prorated as follows: (i) if the one-year anniversary of the commencement of the Performance Period has
occurred as of the date of Retirement, then the Key Person shall be eligible to vest in 100% of the Award; and (ii) if the one-year anniversary
of the commencement of the Performance Period has not occurred as of the date of Retirement, then the Key Person shall be eligible to vest
in a percentage of the Award equal to a fraction, the numerator of which is the number of days between the commencement of the
Performance Period and the date of Retirement and the denominator of which is 365. Notwithstanding the definition of “Retirement” in the
Plan, for the purposes of this Agreement, “Retirement” means the Key Person voluntarily incurs a Separation from Service with the
Company or a Subsidiary (A) after he/she has attained at least 60 years of age and completed at least five years of service with the Company
or its Subsidiaries or (B) under circumstances that the Committee determines, in its sole discretion, qualify as a Retirement from the
Company or a Subsidiary.
Change of Control. In the event of a Change of Control occurring after the Grant Date, the Change of Control provisions of
5.
Article 14 of the Plan shall apply to the PSUs. As permitted under Sections 14.1 and 14.2(c) of the Plan, upon a Change of Control,
the amount of the Award that will be deemed to have been earned will be based on the greater of the actual and assumed achievement
of the Award Components as of the date of the Change of Control.
6.
Non-Transferability of PSUs. Except as expressly provided in the Plan or this Agreement, PSUs may not be sold, assigned,
transferred, pledged or otherwise disposed of, shall not be assignable by operation of law, and shall not be subject to execution, attachment or
similar process, except by will or the laws of descent and distribution. Any attempted sale, assignment, transfer, pledge or other disposition of
any PSU prior to vesting shall be null and void and without effect.
7.
Taxes. The Key Person shall be responsible for taxes due upon the settlement of any PSU granted hereunder and upon any
later transfer by the Key Person of any Share received upon the settlement of a PSU; provided that, unless the Committee determines
otherwise, the Company shall withhold Shares otherwise deliverable to the Key Person as a result of the vesting and settlement of the PSUs to
cover all taxes due for those PSUs.
8.
Payroll Authorization. In the event that the Key Person does not make an arrangement acceptable to the Company to pay to
the Company the tax withholding obligation due upon vesting or settlement of a PSU or in the event that the Key Person does not pay the
entire tax withholding obligation due upon vesting or settlement of a PSU, the Key Person authorizes the Company to collect the amount due
through a payroll withholding or to direct a broker to sell a sufficient number of the Key Person’s Shares to satisfy such obligation (and any
related brokerage fees) and to remit to the Company from the proceeds of sale the amount due. In the event that the Key Person pays more
than the tax withholding obligation due upon vesting or settlement of a PSU, the Key Person authorizes the Company to return the excess
payment through the Key Person’s payroll.
9.
No Rights as a Stockholder. Prior to the settlement of any PSU, the Key Person has no rights with respect to the Share
issuable to the Key Person upon such settlement, shall not be treated as a Stockholder, and shall not have any voting rights or the right to
receive any dividends with respect to the PSU or the underlying Share.
10.
Notices. Any notices required or permitted hereunder shall be sent using any means (including personal delivery, courier,
messenger service, facsimile transmission or electronic transmission), if to the Key Person, at the address as the Key Person may designate in
writing to the Company or to the Key Person’s home address if no other address has been provided to the Company; and, if to the Company,
at the address of its headquarters in Chicago, Attention: General Counsel, or such other address as the Company may designate in writing to
the Key Person. Such notice shall be deemed duly given when it is actually received by the party for whom it was intended. The Company
may deliver any documents related to current or future participation in the Plan by electronic means and the Key Person’s acceptance of the
Award constitutes the Key Person’s consent to receive those documents by electronic delivery and to participate in the Plan through any on-
line or electronic system established and maintained by the Company or a third party designated by the Company.
11.
Failure to Enforce Not a Waiver. The failure of the Company to enforce at any time any provision of this Agreement shall
in no way be construed to be a waiver of such provision or of any other provision hereof.
12.
Amendment or Termination. This Agreement may not be amended or terminated unless such amendment or termination is
in writing and duly executed by each of the parties hereto.
13.
Benefit and Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the Company, its
successors and assigns, and the Key Person and the Key Person’s executors, administrators, personal representatives and heirs. In the event
that any part of this Agreement shall be held to be invalid or unenforceable, the remaining parts hereof shall nevertheless continue to be valid
and enforceable as though the invalid portions were not a part hereof.
14.
Entire Agreement. This Agreement contains the entire understanding of the parties hereto with respect to the subject
matter hereof and supersedes all prior agreements, discussions and understandings relating to such subject matter; provided, however, for the
avoidance of doubt, the parties acknowledge that any confidentiality, non-competition, non-solicitation or similar restrictive covenant agreed
to by the parties hereto on or before the Grant Date is not superseded by this Agreement and is an obligation of the parties hereto in addition
to Section 17 below.
15.
Governing Law and Venue. This Agreement shall be governed by, and construed and enforced in accordance with, the
laws of the State of Delaware, without giving effect to principles and provisions thereof relating to conflict or choice of laws. Any and all
actions concerning any dispute arising hereunder shall be filed and maintained only in a state or federal court sitting in the County of Cook,
State of Illinois. The parties hereto specifically consent and submit to the jurisdiction of such court.
16.
Incorporation of Terms of Plan. The terms of the Plan are incorporated herein by reference and the Key Person’s rights
hereunder are subject to the terms of the Plan even to the extent they are inconsistent with or in addition to the terms set forth herein. The Key
Person hereby agrees to comply with all requirements of the Plan.
17.
Non-Competition and Confidentiality. (a) Notwithstanding any provision to the contrary set forth elsewhere herein, the
PSUs, the Shares underlying the PSUs, and any proceeds received by the Key Person upon the sale of Shares underlying the PSUs shall be
forfeited by the Key Person to the Company without any consideration therefore, if the Key Person is not in compliance, at any time during
the period commencing on the Grant Date and ending nine months following the Key Person’s Separation from Service (or, if continued
vesting applies under Section 4, for the duration of the continued vesting period, if longer than nine months), with all applicable provisions of
the Plan and with the following conditions:
(i) the Key Person shall not directly or indirectly (1) be employed by, engage or have any interest in any business which is
or becomes competitive with the Company or its Subsidiaries or is or becomes otherwise prejudicial to or in conflict with the interests of the
Company or its Subsidiaries, (2) induce any customer of the Company or its Subsidiaries to patronize such competitive business or otherwise
request or advise any such customer to withdraw, curtail or cancel any of its business with the Company or its Subsidiaries, or (3) hire or
solicit for employment any person employed by the Company or its Subsidiaries or hire any person who was employed by the Company or its
Subsidiaries at any time within nine months of such hire; provided, however, that this restriction shall not prevent the Key Person from
acquiring and holding up to two percent of the outstanding shares of capital stock of any corporation which is or becomes competitive with
the Company or is or becomes otherwise prejudicial to or in conflict with the interests of the Company if such shares are available to the
general public on a national securities exchange or in the over-the-counter market; and
(ii) the Key Person shall not use or disclose, except for the sole benefit of or with the written consent of the Company, any
confidential information relating to the business, processes or products of the Company. Nothing in this Agreement, however, prohibits the
Key Employee from reporting violations of law or regulation to any U.S. federal, state or local governmental or law enforcement branch,
agency or entity (collectively, a “Governmental Entity”), or from cooperating with any Governmental Entity, including the EEOC, the
Securities and Exchange Commission or the Department of Justice.
(b) The Company shall notify in writing the Key Person of any violation by the Key Person of this Section 17. The forfeiture shall
be effective as of the date of the occurrence of any of the activities set forth in Section 17(a) above. If the Shares underlying the PSUs have
been sold, the Key Person shall promptly pay to the Company the amount of the proceeds from such sale. The Key Person hereby consents to
a deduction from any amounts owed by the Company to the Key Person from time to time (including amounts owed as wages or other
compensation, fringe benefits or vacation pay) to the extent of the amounts owed by the Key Person to the Company under this Section 17.
Whether or not the Company elects to make any set-off in whole or in part, the Key Person agrees to timely pay any amounts due under this
Section 17. In addition, the Company shall be entitled to injunctive relief for any violation by the Key Person of this Section 17.
(c) Notwithstanding any provision of this Agreement to the contrary, the Key Person shall be entitled to communicate, cooperate
and file a complaint with any Governmental Entity concerning possible violations of any U.S. federal, state or local law or regulation, and to
otherwise make disclosures to any Governmental Entity, in each case, that are protected under the whistleblower provisions of any such law
or regulation, as long as in each case the communications and disclosures are consistent with applicable law. The Key Person shall not forfeit
any PSUs, Shares held in connection with any PSUs or proceeds from the sale of such Shares as a result of exercising any rights under this
Section 17(c).
(d) The obligations of this Section 17 shall survive the Key Person’s Separation from Service.
Hedging Positions. The Key Person agrees that, at any time during the period commencing on the Grant Date and ending
18.
when the Award is fully settled or the PSUs are forfeited, the Key Person shall not (a) directly or indirectly sell any equity security of
the Company if the Key Person does not own the security sold, or if owning the security, does not deliver it against such sale within
20 days thereafter; or (b) establish a derivative security position with respect to any equity security of the Company that increases in
value as the value of the underlying equity decreases (including a long put option and a short call option position) with securities
underlying the position exceeding the underlying securities otherwise owned by the Key Person. In the event the Key Person violates
this provision, the Company shall have the right to cancel the Award.
19.
Code Section 409A. The PSUs are intended to be exempt from (or in the alternative to comply with) Code Section 409A.
This Agreement shall be construed and interpreted in a manner consistent with the requirements for avoiding taxes or penalties under Code
Section 409A, consistent with Section 18.6 of the Plan. For purposes of Code Section 409A, each installment payment under this Agreement
or the Plan, or otherwise payable to the Key Employee, shall be treated as a separate payment. Notwithstanding the foregoing, neither the
Company nor the Committee shall have any obligation to take any action to prevent the assessment of any additional tax or penalty on the
Key Employee under Code Section 409A and neither the Company nor the Committee shall have any liability to the Key Employee for such
tax or penalty.
20.
Clawback. The Award and all amounts and benefits received or outstanding under the Plan shall be subject to potential
clawback, cancellation, recoupment, rescission, payback, reduction or other similar action in accordance with the terms and conditions of any
applicable Company clawback or similar policy or any applicable law related to such actions, as may be in effect from time to time. The Key
Person’s acceptance of the Award constitutes the Key Person’s acknowledgement of and consent to the Company’s application,
implementation and enforcement of any applicable Company clawback or similar policy that may apply to the Key Person, whether adopted
before or after the Grant Date, and any provision of applicable law relating to clawback, cancellation, recoupment, rescission, payback or
reduction of compensation, and the Key Person’s agreement that the Company may take such actions as may be necessary to effectuate any
such policy or applicable law, without further consideration or action.
21.
Dividend Equivalents. If a dividend is paid with respect to the Common Stock, a dividend equivalent equal to the total
dividend the Key Person would have received had the PSUs been actual Shares shall be accumulated and deemed reinvested in additional
PSUs, which shall become earned and payable to the same extent that the underlying PSUs become earned and payable. If the underlying
PSUs are forfeited, the Key Person shall have no right to such dividend equivalents. Reinvestment of dividend equivalents in additional PSUs
at the time of any dividend payment and the payment of Shares with respect to dividend equivalents shall only be permissible if sufficient
Shares are available under the Plan for such reinvestment or payment (taking into account then-outstanding Awards). In the event that
sufficient Shares are not available for such reinvestment or payment, such reinvestment or payment shall be made in the form of a grant of
PSUs equal in number to the Shares that would have been obtained by such payment or reinvestment, the terms of which PSUs shall provide
for settlement in cash and for dividend equivalent reinvestment in further PSUs on the terms contemplated by this Section.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Grant Date.
LKQ CORPORATION KEY PERSON
By: __________________________ By: __________________________
Name:___________________________ Name: _______________________
Title: ____________________________ Address:______________________
PERFORMANCE-BASED RESTRICTED STOCK UNIT AGREEMENT
(PSU 2 AWARD)
LKQ CORPORATION 1998 EQUITY INCENTIVE PLAN (as amended as of August 8, 2016)
Exhibit 10.8
This Performance-Based Restricted Stock Unit Agreement (this “Agreement”) is made and entered into as of the [[DAY]] day of
[[MONTH]] [[YEAR]] (the “Grant Date”) by and between LKQ Corporation, a Delaware corporation (the “Company”), and
[[FIRSTNAME]] [[LASTNAME]] (the “Key Person”).
Recitals
The Board is of the opinion that the interests of the Company will be advanced by encouraging certain persons affiliated with the
Company, upon whose judgment, initiative and efforts the Company depends for the successful conduct of the Company’s business, to
acquire or increase their proprietary interest in the Company, thus providing them with a more direct stake in its welfare and assuring a closer
identification of their interests with those of the Company.
The Board is of the opinion that the Key Person is such a person.
The Company desires to grant performance-based RSUs to the Key Person, and the Key Person desires to accept such grant, all on
the terms and subject to the conditions set forth in this Agreement and set forth in the Company’s 1998 Equity Incentive Plan (the “Plan”).
Any capitalized term used herein that is not defined shall have the meaning of such term set forth in the Plan.
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:
Covenants
1.
Grant of PSUs. The Company hereby grants to the Key Person and the Key Person hereby accepts from the Company the
number of performance-based RSUs set forth in Exhibit A (“PSUs”), on the terms and subject to the conditions set forth herein and in the
Plan (the “Award”).
2.
Representations of Key Person. The Key Person hereby represents and warrants that the Key Person has been provided a
copy of the Plan (which is also filed publicly) and a Plan prospectus describing the material terms of the Plan, and is accepting the PSUs with
full knowledge of and subject to the restrictions contained in this Agreement and the Plan.
3.
Vesting and Settlement. The Award shall vest according to the Award Component Matrix attached hereto as Exhibit A,
which consists of performance metrics (the “Award Components”) measured over a performance period (the “Performance Period”), in
each case as set forth in Exhibit A. At the end of the Performance Period, any PSUs that have not vested shall be forfeited. Within 30 days of
the satisfaction of the performance-based vesting condition, one Share shall be delivered to the Key Person in settlement of each vested PSU.
4.
Separation from Service. (a) Except as otherwise provided in this Section 4 and Section 5, in the event the Key Person
incurs a Separation from Service prior to the end of the Performance Period, the Award shall be forfeited to the Company.
(b) In the event the Key Person incurs a Separation from Service due to death or Disability before the end of the Performance
Period, the PSUs shall immediately become fully vested at “target.”
(c) In the event the Key Person incurs a Separation from Service due to Retirement, the Key Person shall continue to vest in the
PSUs subject to all the terms of this Agreement (including the performance-based vesting conditions), except that the Service requirement
will not apply and the Award will be prorated as follows: (i) if the one-year anniversary of the commencement of the Performance Period has
occurred as of the date of Retirement, then
the Key Person shall be eligible to vest in 100% of the Award; and (ii) if the one-year anniversary of the commencement of the Performance
Period has not occurred as of the date of Retirement, then the Key Person shall be eligible to vest in a percentage of the Award equal to a
fraction, the numerator of which is the number of days between the commencement of the Performance Period and the date of Retirement and
the denominator of which is 365. Notwithstanding the definition of “Retirement” in the Plan, for the purposes of this Agreement,
“Retirement” means the Key Person voluntarily incurs a Separation from Service with the Company or a Subsidiary (A) after he/she has
attained at least 60 years of age and completed at least five years of service with the Company or its Subsidiaries (B) under circumstances that
the Committee determines, in its sole discretion, qualify as a Retirement from the Company or a Subsidiary.
5.
Change of Control. In the event of a Change of Control occurring after the Grant Date, the Change of Control provisions of
Article 14 of the Plan shall apply to the PSUs. As permitted under Sections 14.1 and 14.2(c) of the Plan, upon a Change of Control, the
amount of the Award that will be deemed to have been earned will be based on the greater of the actual and assumed achievement of the
Award Components as of the date of the Change of Control.
6.
Non-Transferability of PSUs. Except as expressly provided in the Plan or this Agreement, PSUs may not be sold, assigned,
transferred, pledged or otherwise disposed of, shall not be assignable by operation of law, and shall not be subject to execution, attachment or
similar process, except by will or the laws of descent and distribution. Any attempted sale, assignment, transfer, pledge or other disposition of
any PSU prior to vesting shall be null and void and without effect.
7.
Taxes. The Key Person shall be responsible for taxes due upon the settlement of any PSU granted hereunder and upon any
later transfer by the Key Person of any Share received upon the settlement of a PSU; provided that, unless the Committee determines
otherwise, the Company shall withhold Shares otherwise deliverable to the Key Person as a result of the vesting and settlement of the PSUs to
cover all taxes due for those PSUs.
8.
Payroll Authorization. In the event that the Key Person does not make an arrangement acceptable to the Company to pay to
the Company the tax withholding obligation due upon vesting or settlement of a PSU or in the event that the Key Person does not pay the
entire tax withholding obligation due upon vesting or settlement of a PSU, the Key Person authorizes the Company to collect the amount due
through a payroll withholding or to direct a broker to sell a sufficient number of the Key Person’s Shares to satisfy such obligation (and any
related brokerage fees) and to remit to the Company from the proceeds of sale the amount due. In the event that the Key Person pays more
than the tax withholding obligation due upon vesting or settlement of a PSU, the Key Person authorizes the Company to return the excess
payment through the Key Person’s payroll.
9.
No Rights as a Stockholder. Prior to the settlement of any PSU, the Key Person has no rights with respect to the Share
issuable to the Key Person upon such settlement, shall not be treated as a Stockholder, and shall not have any voting rights or the right to
receive any dividends with respect to the PSU or the underlying Share.
10.
Notices. Any notices required or permitted hereunder shall be sent using any means (including personal delivery, courier,
messenger service, facsimile transmission or electronic transmission), if to the Key Person, at the address as the Key Person may designate in
writing to the Company or to the Key Person’s home address if no other address has been provided to the Company; and, if to the Company,
at the address of its headquarters in Chicago, Attention: General Counsel, or such other address as the Company may designate in writing to
the Key Person. Such notice shall be deemed duly given when it is actually received by the party for whom it was intended. The Company
may deliver any documents related to current or future participation in the Plan by electronic means and the Key Person’s acceptance of the
Award constitutes the Key Person’s consent to receive those documents by electronic delivery and to participate in the Plan through any on-
line or electronic system established and maintained by the Company or a third party designated by the Company.
11.
Failure to Enforce Not a Waiver. The failure of the Company to enforce at any time any provision of this Agreement shall
in no way be construed to be a waiver of such provision or of any other provision hereof.
12.
Amendment or Termination. This Agreement may not be amended or terminated unless such amendment or termination is
in writing and duly executed by each of the parties hereto.
13.
Benefit and Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the Company, its
successors and assigns, and the Key Person and the Key Person’s executors, administrators, personal representatives and heirs. In the event
that any part of this Agreement shall be held to be invalid or unenforceable, the remaining parts hereof shall nevertheless continue to be valid
and enforceable as though the invalid portions were not a part hereof.
14.
Entire Agreement. This Agreement contains the entire understanding of the parties hereto with respect to the subject
matter hereof and supersedes all prior agreements, discussions and understandings relating to such subject matter; provided, however, for the
avoidance of doubt, the parties acknowledge that any confidentiality, non-competition, non-solicitation or similar restrictive covenant agreed
to by the parties hereto on or before the Grant Date is not superseded by this Agreement and is an obligation of the parties hereto in addition
to Section 17 below.
15.
Governing Law and Venue. This Agreement shall be governed by, and construed and enforced in accordance with, the
laws of the State of Delaware, without giving effect to principles and provisions thereof relating to conflict or choice of laws. Any and all
actions concerning any dispute arising hereunder shall be filed and maintained only in a state or federal court sitting in the County of Cook,
State of Illinois. The parties hereto specifically consent and submit to the jurisdiction of such court.
16.
Incorporation of Terms of Plan. The terms of the Plan are incorporated herein by reference and the Key Person’s rights
hereunder are subject to the terms of the Plan even to the extent they are inconsistent with or in addition to the terms set forth herein. The Key
Person hereby agrees to comply with all requirements of the Plan.
17.
Non-Competition and Confidentiality. (a) Notwithstanding any provision to the contrary set forth elsewhere herein, the
PSUs, the Shares underlying the PSUs, and any proceeds received by the Key Person upon the sale of Shares underlying the PSUs shall be
forfeited by the Key Person to the Company without any consideration therefore, if the Key Person is not in compliance, at any time during
the period commencing on the Grant Date and ending nine months following the Key Person’s Separation from Service (or, if continued
vesting applies under Section 4, for the duration of the continued vesting period, if longer than nine months), with all applicable provisions of
the Plan and with the following conditions:
(i) the Key Person shall not directly or indirectly (1) be employed by, engage or have any interest in any business which is
or becomes competitive with the Company or its Subsidiaries or is or becomes otherwise prejudicial to or in conflict with the interests of the
Company or its Subsidiaries, (2) induce any customer of the Company or its Subsidiaries to patronize such competitive business or otherwise
request or advise any such customer to withdraw, curtail or cancel any of its business with the Company or its Subsidiaries, or (3) hire or
solicit for employment any person employed by the Company or its Subsidiaries or hire any person who was employed by the Company or its
Subsidiaries at any time within nine months of such hire; provided, however, that this restriction shall not prevent the Key Person from
acquiring and holding up to two percent of the outstanding shares of capital stock of any corporation which is or becomes competitive with
the Company or is or becomes otherwise prejudicial to or in conflict with the interests of the Company if such shares are available to the
general public on a national securities exchange or in the over-the-counter market; and
(ii) the Key Person shall not use or disclose, except for the sole benefit of or with the written consent of the Company, any
confidential information relating to the business, processes or products of the Company. Nothing in this Agreement, however, prohibits the
Key Employee from reporting violations of law or regulation to any U.S. federal, state or local governmental or law enforcement branch,
agency or entity (collectively, a “Governmental Entity”), or from cooperating with any Governmental Entity, including the EEOC, the
Securities and Exchange Commission or the Department of Justice.
(b) The Company shall notify in writing the Key Person of any violation by the Key Person of this Section 17. The forfeiture shall
be effective as of the date of the occurrence of any of the activities set forth in Section 17(a) above. If the Shares underlying the PSUs have
been sold, the Key Person shall promptly pay to the Company the amount of the proceeds from such sale. The Key Person hereby consents to
a deduction from any amounts owed by the Company to the Key Person from time to time (including amounts owed as wages or other
compensation, fringe benefits or vacation pay) to the extent of the amounts owed by the Key Person to the Company under this Section 17.
Whether or not the Company elects to make any set-off in whole or in part, the Key Person agrees to timely pay any amounts due under this
Section 17. In addition, the Company shall be entitled to injunctive relief for any violation by the Key Person of this Section 17.
(c) Notwithstanding any provision of this Agreement to the contrary, the Key Person shall be entitled to communicate, cooperate
and file a complaint with any Governmental Entity concerning possible violations of any U.S. federal, state or local law or regulation, and to
otherwise make disclosures to any Governmental Entity, in each case, that are protected under the whistleblower provisions of any such law
or regulation, as long as in each case the communications and disclosures are consistent with applicable law. The Key Person shall not forfeit
any PSUs, Shares held in connection with any PSUs or proceeds from the sale of such Shares as a result of exercising any rights under this
Section 17(c).
(d) The obligations of this Section 17 shall survive the Key Person’s Separation from Service.
18.
Hedging Positions. The Key Person agrees that, at any time during the period commencing on the Grant Date and ending
when the Award is fully settled or the PSUs are forfeited, the Key Person shall not (a) directly or indirectly sell any equity security of the
Company if the Key Person does not own the security sold, or if owning the security, does not deliver it against such sale within 20 days
thereafter; or (b) establish a derivative security position with respect to any equity security of the Company that increases in value as the
value of the underlying equity decreases (including a long put option and a short call option position) with securities underlying the position
exceeding the underlying securities otherwise owned by the Key Person. In the event the Key Person violates this provision, the Company
shall have the right to cancel the Award.
19.
Code Section 409A. The PSUs are intended to be exempt from (or in the alternative to comply with) Code Section 409A.
This Agreement shall be construed and interpreted in a manner consistent with the requirements for avoiding taxes or penalties under Code
Section 409A, consistent with Section 18.6 of the Plan. For purposes of Code Section 409A, each installment payment under this Agreement
or the Plan, or otherwise payable to the Key Employee, shall be treated as a separate payment. Notwithstanding the foregoing, neither the
Company nor the Committee shall have any obligation to take any action to prevent the assessment of any additional tax or penalty on the
Key Employee under Code Section 409A and neither the Company nor the Committee shall have any liability to the Key Employee for such
tax or penalty.
20.
Clawback. The Award and all amounts and benefits received or outstanding under the Plan shall be subject to potential
clawback, cancellation, recoupment, rescission, payback, reduction or other similar action in accordance with the terms and conditions of any
applicable Company clawback or similar policy or any applicable law related to such actions, as may be in effect from time to time. The Key
Person’s acceptance of the Award constitutes the Key Person’s acknowledgement of and consent to the Company’s application,
implementation and enforcement of any applicable Company clawback or similar policy that may apply to the Key Person, whether adopted
before or after the Grant Date, and any provision of applicable law relating to clawback, cancellation, recoupment, rescission, payback or
reduction of compensation, and the Key Person’s agreement that the Company may take such actions as may be necessary to effectuate any
such policy or applicable law, without further consideration or action.
21.
Dividend Equivalents. If a dividend is paid with respect to the Common Stock, a dividend equivalent equal to the total
dividend the Key Person would have received had the PSUs been actual Shares shall be accumulated and deemed reinvested in additional
PSUs, which shall become earned and payable to the same extent that the underlying PSUs become earned and payable. If the underlying
PSUs are forfeited, the Key Person shall have no right to such dividend equivalents. Reinvestment of dividend equivalents in additional PSUs
at the time of any dividend payment and the payment of Shares with respect to dividend equivalents shall only be permissible if sufficient
Shares are available under the Plan for such reinvestment or payment (taking into account then-outstanding Awards). In the event that
sufficient Shares are not available for such reinvestment or payment, such reinvestment or payment shall be made in the form of a grant of
PSUs equal in number to the Shares that would have been obtained by such payment or reinvestment, the terms of which PSUs shall provide
for settlement in cash and for dividend equivalent reinvestment in further PSUs on the terms contemplated by this Section.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Grant Date.
LKQ CORPORATION KEY PERSON
By: __________________________ By: __________________________
Name:___________________________ Name: _______________________
Title: ____________________________ Address:______________________
Exhibit A
Threshold
Number of PSUs
1/2 Target PSUs
Target PSUs
[[SHARESGRANTED AT
TARGET]]
Maximum
2X Target PSUs
Performance Period: January 1, [[YEAR]] to December 31, [[YEAR]]
Award Component Matrix
The Award Components consist of the following: (1) The average of the Company’s annual parts and services organic revenue growth during
the Performance Period; (2) The Company’s adjusted diluted earnings per share in year [[YEAR]]; and (3) The average of the Company’s
annual return on invested capital (ROIC) during the Performance Period (the ROIC in any given year shall be calculated as the adjusted net
income before interest expense (NOPAT) divided by the sum of (i) average total debt, net of cash and (ii) average equity). For purposes of
calculating annual return on invested capital, (i) the impact of acquisitions with a purchase price over $50 million completed during the
Performance Period will be excluded from the calculation in each of the three years, (ii) NOPAT will not be adjusted for currency impacts,
and (iii) invested capital will be based on a five quarter average and will not be adjusted for changes to NOPAT or currency impacts (e.g.,
CTA). Portions of the Award will vest based on the percentages allocated to each Award Component, as illustrated below.
Revenue Component
Average Parts & Services
Organic Revenue Growth over
Performance Period
Earned Revenue Component
(Shares)
Weighting of Revenue
Component
[[•]]%
[[•]]%
[[•]]%
EPS Component
[[•]]
[[•]]
[[•]]
40%
Adjusted Diluted EPS
in year 2021
Earned EPS Component
(Shares)
Weighting of EPS
Component
$[[•]]
$[[•]]
$[[•]]
ROIC Component
[[•]]
[[•]]
[[•]]
40%
Average ROIC over
Performance Period
Earned ROIC Component
(Shares)
Weighting of ROIC
Component
[[•]]%
[[•]]%
[[•]]%
[[•]]
[[•]]
[[•]]
20%
Threshold
Target
Maximum
Threshold
Target
Maximum
Threshold
Target
Maximum
The earned and payable Award amount will be calculated using the following formula:
(Earned Revenue Component * Weighting of Revenue Component) +
(Earned EPS Component * Weighting of EPS Component) +
(Earned ROIC Component * Weighting of ROIC Component).
Payouts between Threshold and Target and between Target and Maximum will be calculated using a linear function. There will be no payouts
for performance below Threshold and no payments higher than Maximum for performance above Maximum.
The GAAP calculation of each of the above Performance Metrics will be subject to adjustment by the Committee for extraordinary, unusual,
infrequently occurring, or other items if such adjustment is deemed necessary or advisable by the Committee to more accurately achieve the
purposes of this award.
In addition, the Committee will adjust the Performance Metrics or other features of the award (1) that relate to the value or number of the
shares of common stock of the Company to reflect any stock dividend, stock split, recapitalization, combination or exchange of shares, or
other similar changes in such stock, and (2) except as otherwise indicated, to account for changes in the value of foreign currencies of
countries in which the Company operates versus the U.S. dollar (using the average respective exchange rates for the calendar year prior to the
Performance Period).
Notwithstanding any contrary provision of the Plan or this Award Component Matrix, the Committee may adjust the Award payable to you.
M E M O R A N D U M
Exhibit 10.10
TO: [[NAME]]
FROM: Compensation Committee
DATE: [[DATE]], [[YEAR]]
RE: Annual Cash Bonus
You have been selected to participate in the LKQ Corporation Cash Incentive Plan (CIP) for purposes of your potential annual bonus
for the [[YEAR]] performance period. All capitalized terms not otherwise defined in this Memorandum will have the meanings set forth in
the CIP (see Attachment 1). The potential payout under your award is subject to the terms and conditions set forth in this Memorandum and
in the CIP. The information contained herein is personal to you and proprietary to the Company, and by participating in the CIP, you agree to
keep all information stated herein strictly confidential.
Performance Period: [[DATE]], [[YEAR]] to [[DATE]], [[YEAR]]
Target Award:
Performance Metrics:
[[•]]% of “Base Salary,” defined as your weighted average base salary during the Performance Period, before
both (1) deductions for taxes or benefits and (2) deferrals of compensation pursuant to any Company- or
Affiliate-sponsored deferred compensation plan.
(1) “EBITDA Dollars” defined as Segment EBITDA, as presented in our public filings, for the Performance
Period. Segment EBITDA is calculated as EBITDA excluding restructuring and acquisition related expenses,
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 and
impairment of goodwill. EBITDA, which is the basis for Segment EBITDA, is calculated as net income, less
net income (loss) attributable to noncontrolling interest, excluding discontinued operations, depreciation,
amortization, interest (which includes loss on debt extinguishment) and income tax expense.
(2) “EBITDA Margin” defined as EBITDA Dollars divided by Total Revenue, as presented in our
public filings, for the Performance Period.
(3) “Free Cash Flow Component” defined as operating cash flows less capital expenditures, as
presented in our public filings, for the Performance Period.
Adjustments:
The calculation of each of the above Performance Metrics will be subject to adjustment by the Committee for
extraordinary, unusual, infrequently occurring, or other items if such adjustment is deemed necessary or
advisable by the Committee to more accurately achieve the purposes of this award.
In addition, the Committee will adjust the Performance Metrics or other features of the award to account for
changes in the value of foreign currencies of countries in which the Company operates versus the U.S. dollar
(using the average respective exchange rates applied in the [[YEAR]] budget).
Notwithstanding any contrary provision of the CIP, this Memorandum, or the Payout Formula, the Committee
may adjust the Actual Award payable to you. In addition, this Award shall be subject to potential clawback,
cancellation, recoupment, rescission, payback, reduction or other similar action in accordance with the terms
and conditions of any applicable clawback or similar policy or any applicable law related to such actions, as
may be in effect from time to time.
Payout Formula: See immediately below.
EBITDA Dollars Component
EBITDA Dollars for
Performance Period
Earned % of EBITDA Dollars
Component
Weighting of EBITDA
Dollars Component
$[[•]]
$[[•]]
$[[•]]
[[•]]%
[[•]]%
[[•]]%
30%
EBITDA Margin Component
EBITDA Margin for
Performance Period
Earned % of EBITDA Margin
Component
Weighting of EBITDA
Margin Component
[[•]]%
[[•]]%
[[•]]%
[[•]]%
[[•]]%
[[•]]%
30%
Free Cash Flow Component
Free Cash Flow for
Performance Period
Earned % of Free Cash Flow
Component
Weighting of Free Cash
Flow Component
$[[•]]
$[[•]]
$[[•]]
[[•]]%
[[•]]%
[[•]]%
40%
Threshold
Target
Maximum
Threshold
Target
Maximum
Threshold
Target
Maximum
Your Actual Award amount will be calculated using the following Payout Formula:
(Earned % of EBITDA Dollars Component * Weighting of EBITDA Dollars Component * Base Salary) +
(Earned % of EBITDA Margin Component * Weighting of EBITDA Margin Component * Base Salary) +
(Earned % of Free Cash Flow Component * Weighting of Free Cash Flow Component * Base Salary).
* Payouts between Threshold and Target and between Target and Maximum shall be calculated using a linear function. There shall be no
payouts for performance below Threshold and no payments higher than Maximum for performance above Maximum.
M E M O R A N D U M
Exhibit 10.11
TO: [[YEAR]] CIP Participant
FROM: Compensation Committee
DATE: [[DATE]], [[YEAR]]
RE: Long-Term Cash Incentive Award
You are being granted a long-term cash incentive award under the LKQ Corporation Cash Incentive Plan (CIP). All capitalized terms
not otherwise defined in this Memorandum will have the meanings set forth in the CIP. The potential payout under your award is subject to
the terms and conditions set forth in this Memorandum and in the CIP. The information contained herein is personal to you and proprietary to
the Company, and by participating in the CIP, you agree to keep all information stated herein strictly confidential.
Participant:
[[NAME]]
Performance Period: [[DATE]], [[YEAR]] to [[DATE]], [[YEAR]]
Target Award: $[[•]] OR [[•% of Base Salary, defined as •]].
Performance Metrics:
(1) The average of the Company’s annual parts and services organic revenue growth during the Performance
Period.
(2) The Company’s adjusted diluted earnings per share in year [[YEAR]].
(3) The average of the Company’s annual return on invested capital (ROIC) during the Performance
Period (the ROIC in any given year shall be calculated as the adjusted net income before interest expense
(NOPAT) divided by the sum of (i) average total debt, net of cash and (ii) average equity). For purposes of
calculating annual return on invested capital, (i) the impact of acquisitions with a purchase price over $50
million completed during the Performance Period will be excluded from the calculation in each of the three
years, (ii) NOPAT will not be adjusted for currency impacts, and (iii) invested capital will be based on a five
quarter average and will not be adjusted for changes to NOPAT or currency impacts (e.g., CTA). Portions of
the Award will vest based on the percentages allocated to each Award Component, as illustrated below.
Adjustments:
The GAAP calculation of each of the above Performance Metrics will be subject to adjustment by the
Committee for extraordinary, unusual, infrequently occurring, or other items if such adjustment is deemed
necessary or advisable by the Committee to more accurately achieve the purposes of this award.
In addition, the Committee will adjust the Performance Metrics or other features of the award (1) that relate to
the value or number of the shares of common stock of the Company to reflect any stock dividend, stock split,
recapitalization, combination or exchange of shares, or other similar changes in such stock, and (2) except as
otherwise indicated, to account for changes in the value of foreign currencies of countries in which the
Company operates versus the U.S. dollar
(using the average respective exchange rates for the calendar year prior to the Performance Period).
For purposes of determining the EPS and ROIC Components, each shall be increased to the extent that it was
reduced in accordance with generally accepted accounting principles (“GAAP”) by objectively determinable
amounts due to:
1. A change in accounting policy or GAAP;
2. Dispositions of assets or businesses;
3. Asset impairments;
4. Amounts incurred in connection with any financing;
5.
6.
7.
8.
9.
acquisition,
Losses on interest rate swaps resulting from mark to market adjustments or discontinuing
hedges;
Board-approved restructuring,
conjunction with or in anticipation of an acquisition;
Losses (and related fees and expenses) related to extraordinary environmental, legal, product
liability or other contingencies;
Changes in tax laws or regulations or interpretations of such laws or regulations;
A Board-approved divestiture of a material business (i.e., the performance goals shall be
adjusted to account for the divestiture, including, if appropriate, the pro-rata effect of targeted
improvements);
including charges in
or similar charges,
10. Changes in contingent consideration liabilities;
11. Losses from discontinued operations;
12.
13.
14.
The imposition of tariffs or taxes on the importation of inventory;
Amortization expense related to acquired intangible assets; and
Other extraordinary, unusual, or infrequently occurring items as specifically disclosed in the
Company’s financial statements or filings under the Exchange Act.
Notwithstanding any contrary provision of the CIP, this Memorandum, or the Payout Formula, the Committee
may adjust the Actual Award payable to you.
Payout Formula: See immediately below.
Revenue Component
Average Parts & Services
Organic Revenue Growth over
Performance Period
Earned % of Revenue
Component
Weighting of Revenue
Component
[[•]]%
[[•]]%
[[•]]%
EPS Component
[[•]]%
[[•]]%
[[•]]%
40%
Adjusted Diluted EPS
in year 2021
Earned % of EPS Component
Weighting of EPS
Component
$[[•]]
$[[•]]
$[[•]]
ROIC Component
[[•]]%
[[•]]%
[[•]]%
40%
Average ROIC over
Performance Period
Earned % of ROIC
Component
Weighting of ROIC
Component
[[•]]%
[[•]]%
[[•]]%
[[•]]%
[[•]]%
[[•]]%
20%
Threshold
Target
Maximum
Threshold
Target
Maximum
Threshold
Target
Maximum
The earned and payable Award amount will be calculated using the following formula:
(Earned % of Revenue Component * Weighting of Revenue Component * [[Target Award $ Amount]] OR [[Base Salary, if Target Award is expressed
as % of Base Salary]]) + (Earned % of EPS Component * Weighting of EPS Component * [[Target Award $ Amount]] OR [[Base Salary, if Target
Award is expressed as % of Base Salary]]) + (Earned % of ROIC Component * Weighting of ROIC Component * [[Target Award $ Amount]] OR
[[Base Salary, if Target Award is expressed as % of Base Salary]]).
* Payouts between Threshold and Target and between Target and Maximum will be calculated using a linear function. There will be no
payouts for performance below Threshold and no payments higher than Maximum for performance above Maximum.
Exhibit 10.25
CONFIDENTIAL
Change of Control Agreement
October 1, 2019
Arnd Franz
500 W. Madison Street, Suite 2800
Chicago, IL 60661
Dear Arnd:
LKQ Corporation, a Delaware corporation (the “Company”), considers it essential to the best interests of its stockholders to
take reasonable steps to retain key management personnel. Further, the Board of Directors of the Company (the “Board”) recognizes
that the uncertainty and questions that might arise among management in the context of any possible Change of Control (as defined
below) of the Company could result in the departure or distraction of management personnel to the detriment of the Company and its
stockholders.
In order to reinforce and encourage your continued attention and dedication to your assigned duties without distraction in the
face of potentially disturbing circumstances arising from any possible Change of Control, the Company has determined to enter into
this letter agreement (the “Agreement”), which addresses the terms and conditions of your separation from the Company in
connection with a Change of Control or within two (2) years following the Change of Control Date (the “Change of Control
Period”). Capitalized words that are not otherwise defined herein shall have the meanings assigned to those words in Section 11
hereof.
The Agreement provides severance benefits to you under certain circumstances since you are in a select group of
management or highly compensated employees of the Company. This Agreement is designed to be an “employee welfare benefit
plan,” as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Exhibit A is a
part of this Agreement and provides important information regarding this Agreement.
1.
Operation of Agreement. The provisions of this Agreement pertaining to the terms and conditions of your separation from the
Company in connection with a Change of Control (collectively, the “Severance Provisions”) shall apply only if a Change of
Control occurs during the Effective Period. If a Change of Control occurs during the Effective Period, the Severance
Provisions become effective on the date of the Change of Control (the “Change of Control Date”). Notwithstanding the
foregoing, if (a) a Change of Control occurs during the Effective Period; and (b) your employment with the Company is
terminated (other than your voluntary resignation without Good Reason or due to your death or Disability) during the
Effective Period, but within twelve (12) months prior to the date on which the Change of Control occurs; and (c) it is
reasonably demonstrated by you that such termination of employment (i) was at the request of a third party that has taken
steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or in anticipation of a
Change of Control, then the “Change of Control Date” shall instead mean the date immediately prior to the date of such
termination of employment. In connection with the foregoing, your unvested equity-based compensation awards that are
outstanding as of your termination shall remain outstanding to the extent necessary (but subject in all cases to their maximum
term) to enable their potential future vesting and
exercisability should a Change of Control occur within twelve months after your termination without Cause by the Company.
This Agreement will remain in effect until the later of (x) the last day of the Effective Period; or (y) if a Change of Control
occurs during the Effective Period, the date on which all benefits due to you under this Agreement, if any, have been paid.
However, this Agreement will expire earlier (i) upon the date that your employment is terminated by the Company for Cause
or by you without Good Reason or (ii) upon the first anniversary of the termination of your employment by the Company
without Cause if no Change of Control has occurred before such first anniversary.
Termination of Employment by Reason of Death or Disability. Your employment shall terminate automatically if you die
during the Change of Control Period. If the Company determines in good faith that you incurred a Disability during the
Change of Control Period, it may give you written notice, in accordance with Section 5 hereof, of its intention to terminate
your employment. In such event, your employment with the Company shall terminate effective on the thirtieth (30) calendar
day after your receipt of such notice if you have not returned to full-time duties within thirty (30) calendar days after such
receipt. If your employment is terminated for death or Disability during the Change of Control Period, this Agreement shall
terminate without further obligations on the part of the Company other than the obligation to pay to you or your
representative, as applicable, the following amounts:
a.
b.
c.
the Accrued Obligations, which shall be paid to you in a single lump sum cash payment within fifteen (15) calendar
days of the Date of Termination;
the Pro Rata Bonus, which shall be paid to you in a single lump sum cash payment no later than the later of (i) fifteen
(15) calendar days following the Date of Termination or (ii) the effective date of the Waiver and Release; and
the Other Benefits, which shall be paid in accordance with the terms and conditions of such plans, programs, policies,
arrangements or agreements.
Termination for Cause; Resignation Other Than for Good Reason. If your employment is terminated for Cause or you resign
for other than Good Reason during the Change of Control Period, your employment will terminate on the Date of
Termination in accordance with Section 5 hereof and this Agreement shall terminate without further obligations on the part
of the Company other than the obligation to pay to you the following:
a.
b.
the Accrued Obligations, which shall be paid to you in a single lump sum cash payment within fifteen (15) calendar
days of the Date of Termination; and
the Other Benefits, which shall be paid in accordance with the terms and conditions of such plans, programs or
policies.
Termination as a Result of an Involuntary Termination. In the event that your employment with the Company should
terminate during the Change of Control Period as a result of an Involuntary Termination, the Company will be obligated,
except as provided in Section 8 or Section 9 hereof, to provide you the following benefits:
a.
Severance Payment. The Company shall pay to you the following amounts:
2.
3.
4.
i.
ii.
iii.
iv.
v.
the Accrued Obligations, which shall be paid to you in a single lump sum cash payment within fifteen (15)
calendar days of the Date of Termination;
the Pro Rata Bonus, which shall be paid to you in a single lump sum cash payment no later than the later of
(A) fifteen (15) calendar days following the Date of Termination or (B) the effective date of the Waiver and
Release;
an amount equal to the product of (A) 2.0 times (B) the sum of (1) your Adjusted Base Salary plus (2) the
greater of (x) your Target Bonus or (y) the average of the annual bonuses paid or to be paid to you with
respect to the immediately preceding three (3) fiscal years, which amount shall be paid to you in a single lump
sum cash payment no later than the later of (i) fifteen (15) calendar days following the Date of Termination or
(ii) the effective date of the Waiver and Release;
if you had previously consented to the Company’s request to relocate your principal place of employment
more than forty (40) miles from its location immediately prior to the Change of Control, all unreimbursed
relocation expenses incurred by you in accordance with the Company’s relocation policies, which expenses
shall be paid to you in a single lump sum cash payment no later than the later of (A) fifteen (15) calendar days
following the Date of Termination or (B) the effective date of the Waiver and Release; and
the Other Benefits, which shall be paid in accordance with the then-existing terms and conditions of such
plans, programs or policies.
b.
Benefit Continuation. You and your then eligible dependents shall continue to be covered by and participate in the
group health and dental care plans (collectively, “Health Plans”) of the Company (at the Company’s cost) in which
you participated, or were eligible to participate, immediately prior to the Date of Termination through the end of the
Benefit Continuation Period; provided, however, that any medical or dental welfare benefit otherwise receivable by
you hereunder shall be reduced to the extent that you become covered under a group health or dental care plan
providing comparable medical and health benefits. You shall be eligible to participate in such Health Plans on terms
that are at least as favorable as those in effect immediately prior to the Date of Termination. However, in the event
that the terms of the Company’s Health Plans do not permit you to participate in those plans (other than pursuant to
an election under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”)), in lieu of your and
your eligible dependent’s coverage and participation under the Company’s Health Plans, the Company shall pay to
you within fifteen (15) calendar days after the effective date of the Waiver and Release a lump sum equal to two (2)
times your monthly COBRA premium amount for the number of months remaining in the Benefit Continuation
Period. In addition, for the purposes of coverage under COBRA, your COBRA event date will be the date of loss of
coverage described in this paragraph above.
c.
Outplacement Services. The Company shall, at its sole expense as incurred, provide you with outplacement services
on such terms and conditions as may be reasonably determined by the Company prior to the Change of Control.
d.
Acceleration of Stock Awards. All your outstanding awards of restricted stock, stock options, and other equity-based
compensation shall become fully vested and exercisable in full immediately upon the effective date of the Waiver and
Release; provided, however, that any such awards that would be out of the money as of the Date of Termination may
be terminated pursuant to Section 9(b) hereof. In addition, all of your outstanding awards of restricted stock, stock
options, and other equity-based compensation that are not assumed or substituted with awards of equivalent value in
connection with a Change of Control shall become fully vested and exercisable in full immediately upon the Change
of Control.
5.
Date and Notice of Termination. Any termination of your employment by the Company or by you during the Change of
Control Period shall be communicated by a notice of termination to the other party hereto (the “Notice of Termination”). The
Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the
provision so indicated. The date of your termination of employment with the Company (the “Date of Termination”) shall be
determined as follows: (i) if your employment is terminated for Disability, thirty (30) calendar days after a Notice of
Termination is received by you (provided that you shall not have returned to the full-time performance of your duties during
such thirty (30) calendar day period), (ii) if your employment is terminated by the Company in an Involuntary Termination,
the later of the date specified in the Notice of Termination or five (5) calendar days after the date the Notice of Termination
is received by you, (iii) if you terminate your employment for Good Reason, five (5) calendar days after the date the Notice
of Termination is received by the Company, and (iv) if your employment is terminated by the Company for Cause, the later
of the date specified in the Notice of Termination or five (5) calendar days following the date such notice is received by you.
The Date of Termination for a resignation of employment other than for Good Reason shall be the date set forth in the
applicable notice.
6.
No Mitigation or Offset; D&O Insurance.
a.
b.
No Mitigation or Offset. You shall not be required to mitigate the amount of any payment provided for herein by
seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for herein be
reduced by any compensation earned by you as the result of employment by another employer.
D&O Insurance, and Indemnification. Through at least the sixth anniversary of the Date of Termination, the
Company shall maintain coverage for you as a named insured on all directors’ and officers’ insurance maintained by
the Company for the benefit of its directors and officers on at least the same basis as all other covered individuals and
provide you with at least the same corporate indemnification as it provides to other senior executives.
Confidentiality. You agree to treat all Confidential Information as confidential information entrusted to you solely for use as
an employee of the Company, and shall not divulge, reveal or transmit any Confidential Information in any way to persons
not employed by the Company at any time from the date hereof until the end of time, whether or not you continue to be an
employee of the Company, unless authorized in writing by the Company.
Code Section 409A. The Agreement is not intended to constitute a "nonqualified deferred compensation plan" within the
meaning of Code Section 409A. Notwithstanding the foregoing, in the event this Agreement or any benefit paid under this
Agreement to you is deemed to be subject
7.
8.
to Code Section 409A, you consent to the Company's adoption of such conforming amendments as the Company deems
advisable or necessary, in its sole discretion (but without an obligation to do so), to comply with Code Section 409A and
avoid the imposition of taxes under Code Section 409A. This Agreement will be interpreted and construed to not violate
Code Section 409A, although nothing herein will be construed as an entitlement to or guarantee of any particular tax
treatment to you.
For purposes of this Agreement, a termination of employment means a "separation from service" as defined in Code Section
409A. Each payment made pursuant to any provision of this Agreement shall be considered a separate payment and not one
of a series of payments for purposes of Code Section 409A. While it is intended that all payments and benefits provided
under this Agreement to you will be exempt from or comply with Code Section 409A, the Company makes no representation
or covenant to ensure that the payments under this Agreement are exempt from or compliant with Code Section 409A. The
Company will have no liability to you or any other person or entity if a payment or benefit under this Agreement is
challenged by any taxing authority or is ultimately determined not to be exempt or compliant. You further understand and
agree that you will be entirely responsible for any and all taxes on any benefits payable to you as a result of this Agreement.
As a condition of participation in the Agreement, you understand and agree that you will never assert any claims against the
Company for reimbursement or payment of any Code Section 409A additional taxes, penalties and/or interest.
If upon your "separation from service" within the meaning of Code Section 409A, you are then a "specified employee" (as
defined in Code Section 409A), then solely to the extent necessary to comply with Code Section 409A and avoid the
imposition of taxes under Code Section 409A, the Company shall defer payment of "nonqualified deferred compensation"
subject to Code Section 409A payable as a result of and within six (6) months following such "separation from service"
under this Agreement until the earlier of (i) the first business day of the seventh month following your "separation from
service," or (ii) ten (10) days after the Company receives written confirmation of your death. Any such delayed payments
shall be made without interest. For avoidance of doubt, any payment whose amount is derived from the value of a Company
common share shall be calculated using the value of a common share as of the closing on the expiration date of the foregoing
Code Section 409A delay period.
To the extent any nonqualified deferred compensation payment to you could be paid in one or more of your taxable years
depending upon you completing certain employment-related actions, then any such payments will commence or occur in the
later taxable year to the extent required by Code Section 409A.
No reimbursement payable to you pursuant to any provisions of this Agreement or pursuant to any plan or arrangement of the
Company shall be paid later than the last day of the calendar year following the calendar year in which the related expense
was incurred, and no such reimbursement during any calendar year shall affect the amounts eligible for reimbursement in any
other calendar year, except, in each case, to the extent that it does not violate Code Section 409A.
Any reimbursement payable to you under this Agreement or pursuant to any plan or arrangement of the Company shall be
paid in accordance with the Company's established procedures provided, however, that to the extent necessary to comply
with Code Section 409A, the following requirements will be adhered to: (1) such reimbursement arrangements will provide
an objectively determinable nondiscretionary definition of the expenses eligible for reimbursement or of the in-kind benefits
to be provided, (2) such reimbursement arrangements will provide for the
reimbursement of expenses incurred or for the provision of the in-kind benefits during an objectively and specifically
prescribed period (including the lifetime of the service provider), (3) such reimbursement arrangements will provide that the
amount of expenses eligible for reimbursement, or in-kind benefits provided, during your taxable year may not affect the
expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year, (4) the reimbursement of
an eligible expense will be made on or before the last day of your taxable year following the taxable year in which the
expense was incurred, and (5) the right to reimbursement or in-kind benefits will not be subject to liquidation or exchange for
another benefit. Additionally, to the extent required by Code Section 409A, an eligible reimbursement expense must be
incurred by you no later than the end of the second year following the year in which your Date of Termination occurs and
any reimbursement payments to you must be made not later than the end of the third year following your Date of
Termination (or, in the case of in-kind benefits, by the end of the second year following your Date of Termination).
9.
Certain Reduction of Payments by the Company.
a.
b.
Best Net. Anything in this Agreement to the contrary notwithstanding, in the event that the independent auditors of
the Company (the “Accounting Firm”) determine that receipt of all payments or distributions in the nature of
compensation to or for your benefit, whether paid or payable pursuant to this Agreement or otherwise (“Payments”),
would subject you to tax under Section 4999 of the Code, the Payments paid or payable pursuant to this Agreement
(the “COC Payments”), including payments made with respect to equity-based compensation accelerated pursuant to
Section 4(d) hereof, but excluding payments made with respect to Sections 4(a)(i) and 4(a)(ii) hereof (except as
provided below), may be reduced (but not below zero) to the Reduced Amount, but only if the Accounting Firm
determines that the Net After-Tax Receipt of unreduced aggregate Payments would be equal to or less than the Net
After-Tax Receipt of the aggregate Payments as if the Payments were reduced to the Reduced Amount. If such a
determination is not made by the Accounting Firm, you shall receive all COC Payments to which you are entitled
under this Agreement.
Reduced Amount. If the Accounting Firm determines that Payments should be reduced to the Reduced Amount, the
Company shall promptly give you notice to that effect and a copy of the detailed calculation thereof. Absent manifest
error, all determinations made by the Accounting Firm under this Section 9 shall be binding upon you and the
Company and shall be made as soon as reasonably practicable and in no event later than twenty (20) business days
following the Change of Control Date, or such later date on which there has been a Payment. The reduction of the
Payments, if applicable, shall be made by reducing the payments and benefits hereunder in the following order, and
only to the extent necessary to achieve the Reduced Amount:
The Company shall reduce or eliminate the Payments, by first reducing or eliminating the portion of the Payments
which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order
beginning with payments or benefits which are to be paid the farthest in time from the determination.
All fees and expenses of the Accounting Firm in implementing the provisions of this Section 9 shall be borne by the
Company. To the extent requested by you, the Company shall cooperate with you in good faith in valuing services
provided or to be provided by you (including without limitation, your agreeing to refrain from performing services
pursuant to a covenant not to compete or similar covenant) before, on or after the date of a change in ownership or
control of the Company (within the meaning of Q&A-2(b) of the Treasury Regulations adopted under Section 280G
of the Code (the “Regulations”)), such that payments in respect of such services may be considered reasonable
compensation within the meaning of Q&A-9 and Q&A-40 to Q&A-44 of the Regulations and/or exempt from the
definition of the term “parachute payment” within the meaning of Q&A-2(a) of the Regulations in accordance with
Q&A-5(a) of the Regulations.
c.
Subsequent Adjustment. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the
initial determination by the Accounting Firm hereunder, it is possible that amounts will have been paid or distributed
by the Company to you or for your benefit pursuant to this Agreement which should not have been so paid or
distributed (“Overpayment”) or that additional amounts which will have not been paid or distributed by the Company
to you or for your benefit pursuant to this Agreement could have been so paid or distributed (“Underpayment”), in
each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accounting Firm,
based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or you that the
Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, you
shall pay any such Overpayment to the Company; provided, however, that no amount shall be payable by you to the
Company if and to the extent such payment would not either reduce the amount of taxes to which you are subject
under Sections 1 and 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm,
based upon controlling precedent or substantial authority, determines that an Underpayment has occurred, any such
Underpayment shall be paid promptly (and in no event later than sixty (60) days following the date on which the
Underpayment is determined) by the Company to you or for your benefit.
10.
Successors; Binding Agreement.
a.
b.
Assumption by Successor. The Company will require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume
and to agree to perform its obligations under this Agreement in the same manner and to the same extent that the
Company would be required to perform such obligations if no such succession had taken place; provided, however,
that no such assumption shall relieve the Company of its obligations hereunder. As used herein, the “Company” shall
mean the Company as hereinbefore defined and any successor to its business or assets as aforesaid which assumes
and agrees to perform its obligations by operation of law or otherwise.
Enforceability; Beneficiaries. This Agreement shall be binding upon and inure to the benefit of you (and your
personal representatives and heirs) and the Company and any organization which succeeds to substantially all of the
business or assets of the Company, whether by means of merger, consolidation, acquisition of all or substantially all
of the assets of the Company or otherwise, including, without limitation, as a result of a Change of Control or by
operation of law. This Agreement shall inure to the benefit of and be enforceable by your personal or legal
representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die
while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate.
11.
Definitions. For purposes of this Agreement, the following capitalized terms have the meanings set forth below:
a.
b.
c.
d.
e.
f.
g.
h.
“Accounting Firm” has the meaning assigned thereto in Section 9 hereof.
“Accrued Obligations” shall mean all compensation earned or accrued through the Date of Termination but not paid
as of the Date of Termination, including base salary, bonus for the prior performance year, accrued but unused
vacation, and reimbursement of business expenses accrued in accordance with the Company’s business expense
reimbursement policies.
“Adjusted Base Salary” means the greater of your base salary in effect immediately prior to (i) the Change of Control
Date or (ii) the Date of Termination.
“Agreement” has the meaning assigned thereto in the second introductory paragraph hereof.
“Benefit Continuation Period” means the period beginning on the Date of Termination and ending on the last day of
the month in which occurs the earlier of (i) the 24-month anniversary of the Date of Termination and (ii) the date on
which you elect coverage for you and your covered dependents under substantially comparable benefit plans of a
subsequent employer.
“Board” has the meaning assigned thereto in the first introductory paragraph hereof.
“Bonus Opportunity” for any performance year means your maximum cash bonus opportunity for that year, on the
assumption that the Company achieves all applicable performance targets and that you achieve all applicable
individual performance criteria.
“Cause” shall mean (i) your engaging in willful and continued failure to substantially perform your material duties
with the Company (other than due to becoming Disabled); provided, however, that the Company shall have provided
you with written notice of such failure and such failure is not cured by you within twenty (20) calendar days of such
notice; (ii) your engaging in misconduct that is materially and demonstrably injurious to the Company; (iii) your
conviction of, or plea of no contest to, a felony, other crime of moral turpitude; or (iv) a final non-appealable
adjudication in a criminal or civil proceeding that you have committed fraud. For purposes of the previous sentence,
no act or failure to act on your part shall be deemed “willful” if it is done, or omitted to be done, by you in good faith
and with a reasonable belief that it was in the best interest of the Company.
i.
“Change of Control” shall mean:
i.
any “person” (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)) becomes the beneficial owner (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of
ii.
iii.
30% or more of either (A) the then-outstanding shares of common stock of the Company (the “Outstanding
Company Common Stock”) or (B) the combined voting power of the then-outstanding voting securities of the
Company entitled to vote generally in the election of directors (the “Outstanding Company Voting
Securities”); provided, however, that, for purposes of this Section, the following acquisitions shall not
constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the
Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the
Company, or (iv) any acquisition pursuant to a transaction that complies with Sections 11(i)(iii)(A), (B), and
(C);
during any period of two consecutive years (not including any period prior to the Effective Date), individuals
who at the beginning of such period constituted the Board and any new directors, whose election by the Board
or nomination for election by the Company’s stockholders was approved by a vote of at least three-fourths of
the directors then still in office who either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or
there is a consummation of a reorganization, merger, statutory share exchange or consolidation or similar
transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially
all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any
of its subsidiaries (each, a “Business Combination”), in each case unless, following such Business
Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to
such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding
shares of common stock (or, for a non-corporate entity, equivalent securities) and the combined voting power
of the then-outstanding voting securities entitled to vote generally in the election of directors (or, for a non-
corporate entity, equivalent governing body), as the case may be, of the entity resulting from such Business
Combination (including, without limitation, an entity that, as a result of such transaction, owns the Company
or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership immediately prior to such Business Combination of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be,
(B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit
plan (or related trust) of the Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 30% or more of, respectively, the then-outstanding shares of common
stock of the corporation resulting from such Business Combination or the combined voting power of the then-
outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the
Business Combination, and (C) at least a majority of the members of the board of directors (or, for a non-
corporate entity, equivalent governing body) of the entity resulting from such Business Combination were
members of the incumbent Board at the time of the execution of
j.
k.
l.
m.
n.
o.
p.
q.
r.
the initial agreement or of the action of the Board providing for such Business Combination.
“Change of Control Date” has the meaning assigned thereto in Section 1 hereof.
“Change of Control Period” has the meaning assigned thereto in the second introductory paragraph hereof.
“COC Payments” has the meaning assigned thereto in Section 9 hereof.
“Code” shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated
thereunder.
“Company” has the meaning assigned thereto in the first introductory paragraph hereof.
“Confidential Information” shall mean all financial information, trade secrets, personnel records, training and
operational manuals, records, contracts, lists, business procedures, business methods, accounts, brochures, and
handbooks that was learned or obtained by you in the course of your employment by the Company, and all other
documents relating to the Company or persons doing business with the Company that are proprietary to the Company.
“Date of Termination” has the meaning assigned thereto in Section 5 hereof.
“Disability” shall mean your incapacity due to physical or mental illness as defined in the long-term disability plan
sponsored by the Company or an affiliate of the Company for your benefit and which causes you to be absent from
the full-time performance of your duties.
“Effective Period” shall mean the period commencing on the date hereof (the “Effective Date”) and ending on the
third anniversary of the date of this Agreement; provided, however, that beginning on the third anniversary of the date
of this Agreement and on each one-year anniversary thereafter (each such date a “Renewal Date”), the Effective
Period shall be automatically extended for a period of two years beginning on such Renewal Date, unless at least sixty
(60) calendar days prior to such Renewal Date, the Company shall give notice that the Effective Period shall not be so
extended.
s.
“Good Reason” shall mean the occurrence of any of the following events or circumstances:
i.
ii.
a substantial adverse change in your title, position, offices, or the nature of your duties or responsibilities from
those in effect immediately prior to the Change of Control, or in the position, level, or status of the person to
whom you report.
a reduction by the Company in your annual base salary, Target Bonus, or benefits as in effect immediately
prior to the Change of Control or as the same may be increased from time to time thereafter, other than a
general reduction in benefits applicable across similarly situated executives within the Company;
iii.
iv.
a failure by the Company to pay you material compensation or benefits when due including, without
limitation, failure by the Company to pay any accrued relocation expenses or Other Benefits;
the relocation of the office of the Company where you are principally employed immediately prior to the
Change of Control to a location which is more than forty (40) miles from such office of the Company (except
for required travel on the Company’s business to an extent substantially consistent with your customary
business travel obligations in the ordinary course of business prior to the Change of Control); or any failure by
a successor to the Company to assume and agree to perform this Agreement, as contemplated by Section 10(a)
hereof, or any agreement with respect to your outstanding equity awards.
provided, however, that no event or condition set forth in subparagraphs (i) through (v) above shall constitute Good Reason unless
(x) you give the Company written notice of objection to such event or condition within sixty (60) calendar days of the initial
occurrence of such event or condition and (y) such event or condition is not corrected or remedied, in all material respects, by the
Company within thirty (30) calendar days of its receipt of such notice; and provided, further, however, that your mental or physical
incapacity following the occurrence of an event described above in subparagraphs (i) through (v) above shall not affect your ability
to terminate employment for Good Reason and that your death following delivery of a Notice of Termination shall not affect your
estate’s entitlement to the payments and benefits provided hereunder upon an Involuntary Termination. In order to qualify as a
termination of employment due to Good Reason, you must resign your employment for Good Reason within forty (40) calendar days
after you have provided the Company with the foregoing notice that a Good Reason event has occurred.
t.
u.
v.
w.
“Involuntary Termination” shall mean, during the Change of Control Period, (i) your termination of employment by
the Company without Cause or (ii) your resignation of employment with the Company for Good Reason.
“Net After-Tax Receipt” shall mean the present value (as determined in accordance with Section 280G(d)(4) of the
Code) of a Payment net of all taxes imposed on you with respect thereto under Sections 1 and 4999 of the Code and
under applicable state and local laws, determined by applying the highest marginal rate under Section 1 of the Code
and under state and local laws which applied to your taxable income for the immediately preceding taxable year, or
such other rate(s) as you certify as likely to apply to you in the relevant tax year(s).
“Notice of Termination” has the meaning assigned thereto in Section 5 hereof.
“Other Benefits” means, to the extent not theretofore paid or provided, any other amounts or benefits required to be
paid or provided to you or that you are eligible to receive under any plan, program, policy, practice, contract or
agreement of the Company in accordance with such applicable terms at the time of the Date of Termination. Nothing
herein shall prohibit the Company from changing, modifying, amending, or eliminating any benefit plans in
accordance with the terms of such plans prior to the Date of Termination, with or without prior notice.
x.
“Overpayment” has the meaning assigned thereto in Section 9 hereof.
y.
z.
aa.
ab.
ac.
ad.
ae.
“Pro Rata Bonus” means a pro rata portion of your Bonus Opportunity for the performance year in which the Date of
Termination occurs, calculated based on the number of days that you are employed in the performance year up
through and including the Date of Termination.
“Payment” has the meaning assigned thereto in Section 9 hereof.
“Reduced Amount” shall mean $1,000.00 less than the greatest amount of Payments that can be paid that would not
result in the imposition of the excise tax under Section 4999 of the Code.
“Severance Policy” means the Company’s Severance Policy for Key Executives as adopted on July 21, 2014 and as
may be amended from time to time.
“Target Bonus” for any year means your total cash target, but not maximum, bonus for that year, on the assumption
that the Company has achieved, but not exceeded, all applicable performance targets and that you have achieved, but
not exceeded, all applicable individual performance criteria.
“Underpayment” has the meaning assigned thereto in Section 9 hereof.
“Tax Authority” has the meaning assigned thereto in Section 9 hereof.
12.
13.
14.
Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in
writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return
receipt requested, postage prepaid, addressed to the Board of Directors, LKQ Corporation, 500 West Madison Street, Suite
2800, Chicago, IL 60661, with a copy to the General Counsel of the Company, or to you at the address set forth on the first
page of this Agreement or to such other address as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon receipt.
Release. As a condition to receiving any payments or benefits pursuant to this Agreement by reason of your death, Disability
or Involuntary Termination, you (or in the case of your death, the executor of your estate) must execute a waiver and release
of claims, including confidentiality and non-disparagement covenants, substantially in the form approved by the Company
prior to the Change of Control Date (as set forth on Exhibit B attached hereto) (a “Waiver and Release”), and such executed
Waiver and Release must be delivered to the Company (and not revoked by you) and become effective by its own terms no
later than 55 days after the later of (i) the Change of Control or (ii) the termination of your employment with the Company.
Arbitration. Any dispute or controversy arising under or in connection with this Agreement that cannot be mutually resolved
by the parties hereto shall be settled exclusively by arbitration in Chicago, Illinois under the employment arbitration rules of
the American Arbitration Association before one arbitrator of exemplary qualifications and stature, who shall be selected
jointly by the Company and you, or, if the Company and you cannot agree on the selection of the arbitrator, such arbitrator
shall be selected by the American Arbitration Association. Judgment may be entered on the arbitrator’s award in any court
having jurisdiction. The parties hereby agree that the arbitrator shall be empowered to enter an equitable decree mandating
specific enforcement of the terms of
this Agreement. The Company agrees to pay as incurred, to the fullest extent permitted by law, the costs and fees of the
arbitration, including all legal fees and expenses which you may reasonably incur as a result of any contest (regardless of the
outcome thereof) by the Company, you or others of the validity or enforceability of, or liability under, any provision of this
Agreement (including as a result of any contest by you about the amount of any payment pursuant to this Agreement), plus in
each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code.
15.
Miscellaneous.
a.
b.
c.
d.
e.
f.
Amendments, Waivers, Etc. No provision of this Agreement may be modified, waived or discharged unless such
waiver, modification or discharge is agreed to in writing. No waiver by either party hereto at any time of any breach
by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior
or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly set forth in this Agreement and this
Agreement shall supersede all prior agreements, negotiations, correspondence, undertakings and communications of
the parties, oral or written, with respect to the subject matter hereof. Notwithstanding the foregoing and for avoidance
of doubt, this Agreement does not supersede or replace the Severance Policy. However, any payments or benefits
provided (or to be provided) under this Agreement shall be reduced and offset by payments or benefits of the same
type that are received by you from the Company under the Severance Policy or any other severance arrangement.
Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in full force and effect.
Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an
original but all of which together will constitute one and the same instrument.
No Contract of Employment. Nothing in this Agreement shall be construed as giving you any right to be retained in
the employ of the Company or shall affect the terms and conditions of your employment with the Company prior to
the commencement of the Change of Control Period.
Withholding. Amounts paid to you hereunder shall be subject to all applicable federal, state and local withholding
taxes.
Source of Payments. All payments provided under this Agreement shall be paid in cash from the general funds of the
Company, and no special or separate fund shall be established, and no other segregation of assets made, to assure
payment. You will have no right, title or interest whatsoever in or to any investments which the Company may make
to aid it in meeting its obligations hereunder. To the extent that any person acquires a right to receive payments from
the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company.
g.
h.
i.
Headings. The headings contained in this Agreement are intended solely for convenience of reference and shall not
affect the rights of the parties to this Agreement.
Governing Law. This Agreement is governed by ERISA and, to the extent applicable, the laws of the State of
Delaware without regard to conflicts of law.
Effect on Benefit Plans. In the event of any inconsistency between the provisions of this agreement and the provisions
of any benefit plan of the Company, the provisions that are more favorable to you shall control.
By signing below, you acknowledge that this Agreement sets forth our agreement on the subject matter hereof. Kindly sign
and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject.
* * * * *
Sincerely,
LKQ CORPORATION
/s/ Victor M. Casini
By:
Name: Victor M. Casini
Title: Senior Vice President and General Counsel
Agreed to as of this October 1, 2019
/s/ Arnd Franz
Arnd Franz
Senior Vice President of LKQ Corporation and
Chief Executive Officer and Managing Director of
LKQ Europe
The Agreement, including its Exhibits, constitutes both the official plan document and the required summary plan description
EXHIBIT A
under ERISA.
ELIGIBILITY
The Agreement is effective for the individual named in the Agreement (“you”).
BENEFITS
You shall be eligible for severance benefits at such times and in such amounts as may be specified in your Agreement.
OTHER IMPORTANT INFORMATION
A. Agreement Administration. As the Agreement Administrator, the Company has the full and sole discretionary authority
to administer and interpret the Agreement, including discretionary authority to determine eligibility for participation in and for
benefits under the Agreement, to determine the amount of benefits (if any) payable per participant, and to interpret any terms of this
document. All determinations by the Agreement Administrator will be final and conclusive upon all persons and be given the
maximum possible deference allowed by law. The Agreement Administrator is the “named fiduciary” of the Agreement for purposes
of ERISA and will be subject to the applicable fiduciary standards of ERISA when acting in such capacity. The Company may
delegate in writing to any other person all or a portion of its authority or responsibility with respect to the Agreement.
B. Source of Benefits. The Agreement is unfunded, and all severance benefits will be paid from the general assets of the
Company or its successor. No contributions are required under the Agreement.
C. Claims Procedure. If you believe you have been incorrectly denied a benefit or are entitled to a greater benefit than the
benefit you received under the Agreement, you may submit a signed, written application to the Company’s Senior Vice President of
Human Resources (“Claims Administrator”). You will be notified in writing of the approval or denial of this claim within ninety
(90) days of the date that the Claims Administrator receives the claim, unless special circumstances require an extension of time for
processing the claim. In the event an extension is necessary, you will be provided written notice prior to the end of the initial ninety
(90) day period indicating the special circumstances requiring the extension and the date by which the Claims Administrator expects
to notify you of approval or denial of the claim. In no event will an extension extend beyond ninety (90) days after the end of the
initial ninety (90) day period. If your claim is denied, the written notification will state specific reasons for the denial, make specific
reference to the Agreement provision(s) on which the denial is based, and provide a description of any material or information
necessary for you to perfect the claim and why such material or information is necessary. The written notification will also provide a
description of the Agreement’s review procedures and the applicable time limits, including a statement of your right to bring a civil
suit under section 502(a) of ERISA following denial of your claim on review.
You will have sixty (60) days from receipt of the written notification of the denial of your claim to file a signed, written
request for a full and fair review of the denial by a review panel which will be a named fiduciary of the Agreement for purposes of
such review. This request should include the reasons you are requesting a review and may include facts supporting your request and
any other relevant comments, documents, records and other information relating to your claim. Upon request and free of charge, you
will be provided with reasonable access to, and copies of, all documents, records and other information relevant
to your claim, including any document, record or other information that was relied upon in, or submitted, considered or generated in
the course of, denying your claim. A final, written determination of your eligibility for benefits shall be made within sixty (60) days
of receipt of your request for review, unless special circumstances require an extension of time for processing the claim, in which
case you will be provided written notice of the reasons for the delay within the initial sixty (60) day period and the date by which
you should expect notification of approval or denial of your claim. This review will take into account all comments, documents,
records and other information submitted by you relating to your claim, whether or not submitted or considered in the initial review of
your claim. In no event will an extension extend beyond sixty (60) days after the end of the initial sixty (60) day period. If an
extension is required because you fail to submit information that is necessary to decide your claim, the period for making the benefit
determination on review will be tolled from the date the notice of extension is sent to you until the date on which you respond to the
request for additional information. If your claim is denied on review, the written notification will state specific reasons for the denial,
make specific reference to the Agreement provision(s) on which the denial is based and state that you are entitled to receive upon
request, and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to your claim,
including any document, record or other information that was relied upon in, or submitted, considered or generated in the course of,
denying your claim. The written notification will also include a statement of your right to bring an action under section 502(a) of
ERISA.
If your claim is initially denied or is denied upon review, you are entitled to receive upon request, and free of charge,
reasonable access to, and copies of, any document, record or other information that demonstrates that (1) your claim was denied in
accordance with the terms of the Agreement, and (2) the provisions of the Agreement have been consistently applied to similarly
situated participants, if any. In pursuing any of your rights set forth in this section, your authorized representative may act on your
behalf.
If you do not receive notice within the time periods described above, whether on initial determination or review, you may
initiate a lawsuit under Section 502(a) of ERISA.
D. Indemnification. The Company agrees to indemnify its officers and employees and the members of the Board of
Directors of the Company from all liabilities from their acts or omissions in connection with the administration, amendment or
termination of the Agreement, to the maximum extent permitted by applicable law.
E. Severability. If any provision of the Agreement is held invalid or unenforceable, its invalidity or unenforceability will not
affect any other provision of the Agreement, and the Agreement will be construed and enforced as if such provision had not been
included.
F. Headings. Headings in the Agreement are for purposes of reference only and will not limit or otherwise affect the
meaning hereof.
STATEMENT OF ERISA RIGHTS
As a participant in the Agreement you are entitled to certain rights and protections under ERISA. ERISA provides that all
Agreement participants shall be entitled to:
A. Receive Information About Your Agreement and Benefits
Examine, without charge, at the Agreement Administrator’s office and at other specified locations, such as work sites, all
documents governing the Agreement.
Obtain, upon written request to the Agreement Administrator, copies of documents governing the operation of the
Agreement. The Agreement Administrator may impose a reasonable charge for the copies.
B. Prudent Actions by Agreement Fiduciaries
In addition to creating rights for Agreement participants, ERISA imposes duties upon the people who are responsible for the
operation of the employee benefit plan. The people who operate your Agreement, called “fiduciaries” of the Agreement, have a duty
to do so prudently and in the interest of you and other Agreement participants and beneficiaries. No one, including your employer or
any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a welfare benefit or
exercising your rights under ERISA.
C. Enforce Your Rights
If your claim for a welfare benefit is denied or ignored, in whole or in part, you have a right to know why this was done, to
obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules.
Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request a copy of Agreement
documents and do not receive it within 30 days, you may file suit in a federal court. In such a case, the court may require the
Agreement Administrator to provide the materials and pay you up to $110.00 per day until you receive the materials, unless the
materials were not sent because of reasons beyond the control of the Agreement Administrator. If you have a claim for benefits
which is denied or ignored, in whole or in part, you may file suit in a state or federal court after you have completed the Agreement's
administrative appeals process. If you are discriminated against for asserting your rights, you may seek assistance from the U.S.
Department of Labor, or you may file suit in a federal court. The court will decide who should pay court costs and legal fees. If you
are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay
these costs and fees, for example, if it finds your claim is frivolous.
D. Assistance With Your Questions
If you have any questions about the Agreement, you should contact the Agreement Administrator. If you have any questions
about this statement or about your rights under ERISA, or if you need assistance in obtaining documents from the Agreement
Administrator, you should contact the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor,
listed in your telephone directory, or the Division of Technical Assistance and Inquiries, Employee Benefits Security
Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210. You may also obtain certain
publications about your rights and responsibilities under ERISA by calling the publications hotline of the Employee Benefits
Security Administration.
ADDITIONAL AGREEMENT INFORMATION
Name of Agreement:
Change of Control Agreement
Employer Sponsoring Agreement:
Employer Identification Number:
LKQ Corporation.
500 West Madison Street, Suite 2800, Chicago, IL 60661
36-4215970
Agreement Number:
Agreement Year:
528
Calendar Year
Agreement Administrator:
Agent for Service of Legal Process:
LKQ Corporation
c/o Senior Vice President of Human Resources
500 West Madison Street, Suite 2800, Chicago, IL 60661
Telephone No. (312) 621-1950
Agreement Administrator, at the above address
Type of Agreement:
Agreement Costs:
Employee Welfare Benefit Plan providing for severance benefits
The cost of the Agreement is paid by LKQ Corporation
Type of Administration:
Self-administered by the Agreement Administrator
EXHIBIT B
WAIVER AND GENERAL RELEASE AGREEMENT
This Waiver and Release Agreement (this “Release”) is entered into as of the date indicated on the signature page of this
Release by and between LKQ Corporation, a Delaware corporation (the “Company”) and (“Employee”). Employee has been
employed by the Company, and the parties are entering into this Release because the employment relationship is ending, without
fault or wrongdoing on the part of either the Company or Employee, who agree as follows:
1.
Release.
a.
In exchange for the valuable consideration set forth in the Change of Control Agreement dated as of ____________
___, 20___ (the “Letter Agreement”), between Employee and the Company, the receipt and adequacy of which are
herein acknowledged, Employee hereby agrees to release and forever discharge the Company and its present, former
and future partners, shareholders, affiliates, direct and indirect parents, subsidiaries, successors, directors, officers,
employees, agents, attorneys, heirs and assigns (the “Released Parties”), from any and all claims, actions and causes
of action (the “Claims”) arising out of (i) his employment relationship with and service as an employee of the
Company and its affiliates, and the termination of such relationship or service, or (ii) any event, condition,
circumstance or obligation that occurred, existed or arose on or prior to the date hereof, including, but not limited to
any Claims under Title VII of the Civil Rights Act of 1964, the Rehabilitation Act of 1973, the Americans With
Disabilities Act of 1990, the Civil Rights
Act of 1866, the Civil Rights Act of 1991, the Employee Retirement Income Security Act of 1974 (ERISA), the
Family and Medical Leave Act of 1993, the California Fair Employment and Housing Act; the California Workers’
Compensation Act; the California Unruh and Ralph Civil Rights Laws; the California Alcohol and Drug
Rehabilitation Law and any other federal, state or local law, statute, regulation or ordinance, or law of any foreign
jurisdiction, whether such Claim arises under statute or common law and whether or not Employee is presently aware
of the existence of such Claim. Employee also forever releases, discharges and waives any right he may have to
recover in any proceeding brought by any federal, state or local agency against the Released Parties to enforce any
laws. To ensure that this Release is fully enforceable in accordance with its terms, Employee agrees to waive any and
all rights to any Claims, whether or not he knows or suspects them to exist in his favor, which if known to him would
have materially affected his execution of this Release. Notwithstanding the foregoing, this Release does not apply to
Employee’s rights, claims, or benefits under the Letter Agreement or to Employee’s rights, if any, to payment of
benefits pursuant to any employee benefit plan. This Release also does not apply to Employee’s rights, claims, or
benefits claims for unemployment compensation benefits, workers compensation benefits, claims under the Fair
Labor Standards Act, health insurance benefits under the Consolidated Omnibus Budget Reconciliation Act
(COBRA), or claims with regard to vested benefits under a retirement plan governed by ERISA.
b.
To ensure that this Release is fully enforceable in accordance with its terms, Employee hereby agrees to waive
any and all rights under Section 1542 of the California Civil Code (to the extent applicable) as it exists from
time to time, which provides:
A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must have materially affected his settlement with the debtor.
In addition, to ensure that this Release is fully enforceable in accordance with its terms, Employee hereby agrees to waive
any protection that may exist under any comparable or similar statute and under any principle of common law of the United States or
any and all States.
EMPLOYEE UNDERSTANDS THAT, BY SIGNING THIS RELEASE, EMPLOYEE WILL HAVE WAIVED ANY
RIGHT THAT HE MAY HAVE TO BRING A LAWSUIT OR MAKE ANY CLAIM AGAINST THE COMPANY AND
THE RELEASED PARTIES BASED ON ANY ACT OR OMISSIONS BY THEM UP TO THE DATE OF SIGNING THIS
AGREEMENT.
c.
In further consideration of the payments and benefits provided to Employee under the Letter Agreement, Employee
hereby releases and forever discharges the Released Parties from any and all Claims that he may have as of the date
he signs this Release arising under the federal Age Discrimination in Employment Act of 1967, as amended, and the
applicable rules and regulations promulgated thereunder (“ADEA”). By signing this Release, Employee hereby
acknowledges and confirms the following: (i) he was advised by the Company in connection with his termination to
consult with an attorney of his choice prior to signing this Release and to have such attorney explain to him the terms
of this Release, including, without limitation, the terms relating to his release of claims arising under the ADEA; (ii)
if Employee is 40 years of age or older as of the date of execution of this Release, he was given a period of not fewer
than 21 calendar days to consider the terms of this Release and to consult with an attorney of his choosing with
respect thereto;
(iii) he is providing the release and discharge set forth in this Paragraph 1(c) only in exchange for consideration in
addition to anything of value to which he is already entitled and (iv) he can revoke this Release without it becoming
effective as described below.
No Legal Claim. Employee has not commenced any legal action, which term includes, without limitation, any demand for
arbitration proceedings and any charge, complaint, filing or submission with any federal, state or local agency, court or other
tribunal, to assert any Claim against a Released Party, and covenants and agrees not to do so in the future with respect to the
matters released herein. If Employee commences or joins any legal action against a Released Party, Employee agrees that
such an action is prohibited by this Release, and further agrees to promptly indemnify such Released Party for its reasonable
costs and attorneys fees incurred in defending such action as well as forfeit or return any monetary judgment obtained by
Employee against any Released Party in such action. Nothing in this Paragraph 2 is intended to reflect any party’s belief that
Employee’s waiver of claims under the ADEA is invalid or unenforceable under this Release, it being the intent of the parties
that such claims are waived.
Nondisparagement. Employee agrees to refrain, except as required by law or in connection with a judicial proceeding, from
making directly or indirectly, now or at any time in the future, any written or oral statements, representations or other
communications that disparage or are otherwise damaging to the business or reputation of the Released Parties.
Continuing Obligations. This Release shall not supersede any continuing obligations Employee may have under the terms of
the Letter Agreement or any other agreement between Employee and the Company.
Disclaimer. Employee hereby certifies that Employee has read the terms of this Release, that Employee has been advised by
the Company to consult with an attorney of Employee’s own choice prior to executing this Release, that Employee has had
an opportunity to do so, and that Employee understands the provisions and consequences of this Release. Employee further
certifies that the Company has not made any representation to Employee concerning this Release other than those contained
herein.
Governing Law. This Release is governed by ERISA and, to the extent applicable, the laws of the State of Delaware without
regard to conflicts of law.
Separability of Clauses. If any provisions of this Release shall be finally determined to be invalid or unenforceable under
applicable law by a court of competent jurisdiction, that part shall be ineffective to the extent of such invalidity or
unenforceability only, without in any way affecting the remaining provisions of this Release.
Counterparts. This Release may be executed by the parties hereto in counterparts, each of which shall be deemed an original,
but both such counterparts shall together constitute one and the same document.
Effectiveness. This Release shall be effective only when it has been executed by Employee and the executed original has
been returned to the Company, and any applicable revocation period has expired.
2.
3.
4.
5.
6.
7.
8.
9.
IN WITNESS WHEREOF, the Company has caused this Release to be signed by its duly authorized officer, and Employee
has executed this Release as of the day and year indicated below Employee’s signature.
LKQ CORPORATION
By:
Name:
Title:
If Employee is 40 years of age or older as of the date of execution of this Release, Employee shall have the right to revoke this
Release during the seven-day period (the “Revocation Period”) commencing immediately following the date he signs and
delivers this Release to the Company. The Revocation Period shall expire at 5:00 p.m. [INSERT TIME ZONE] Time on the
last day of the Revocation Period; provided, however, that if such seventh day is not a business day, the Revocation Period
shall extend to 5:00 p.m. on the next succeeding business day. In the event Employee revokes this Release, all obligations of
the Company under this Release and under any agreement which are conditional upon this Release shall terminate and be of
no further force and effect as of the date of such revocation. No such revocation by Employee shall be effective unless it is in
writing and signed by him and received by the Company prior to the expiration of the Revocation Period at the following
address:
LKQ Corporation
ATTN: General Counsel
500 W. Madison Street, Suite 2800
Chicago, IL 60661
I HAVE READ AND AGREE
TO THIS RELEASE:
Name:
Date:
Exhibit 10.26
CONFIDENTIAL
Change of Control Agreement
January 31, 2020
Michael T. Brooks
500 W. Madison Street, Suite 2800
Chicago, IL 60661
Dear Michael:
LKQ Corporation, a Delaware corporation (the “Company”), considers it essential to the best interests of its stockholders to
take reasonable steps to retain key management personnel. Further, the Board of Directors of the Company (the “Board”) recognizes
that the uncertainty and questions that might arise among management in the context of any possible Change of Control (as defined
below) of the Company could result in the departure or distraction of management personnel to the detriment of the Company and its
stockholders.
In order to reinforce and encourage your continued attention and dedication to your assigned duties without distraction in the
face of potentially disturbing circumstances arising from any possible Change of Control, the Company has determined to enter into
this letter agreement (the “Agreement”), which addresses the terms and conditions of your separation from the Company in
connection with a Change of Control or within two (2) years following the Change of Control Date (the “Change of Control
Period”). Capitalized words that are not otherwise defined herein shall have the meanings assigned to those words in Section 11
hereof.
The Agreement provides severance benefits to you under certain circumstances since you are in a select group of
management or highly compensated employees of the Company. This Agreement is designed to be an “employee welfare benefit
plan,” as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Exhibit A is a
part of this Agreement and provides important information regarding this Agreement.
1.
Operation of Agreement. The provisions of this Agreement pertaining to the terms and conditions of your separation from the
Company in connection with a Change of Control (collectively, the “Severance Provisions”) shall apply only if a Change of
Control occurs during the Effective Period. If a Change of Control occurs during the Effective Period, the Severance
Provisions become effective on the date of the Change of Control (the “Change of Control Date”). Notwithstanding the
foregoing, if (a) a Change of Control occurs during the Effective Period; and (b) your employment with the Company is
terminated (other than your voluntary resignation without Good Reason or due to your death or Disability) during the
Effective Period, but within twelve (12) months prior to the date on which the Change of Control occurs; and (c) it is
reasonably demonstrated by you that such termination of employment (i) was at the request of a third party that has taken
steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or in anticipation of a
Change of Control, then the “Change of Control Date” shall instead mean the date immediately prior to the date of such
termination of employment. In connection with the foregoing, your unvested equity-based compensation awards that are
outstanding as of your termination shall remain outstanding to the extent necessary (but subject in all cases to their maximum
term) to enable their potential future vesting and
exercisability should a Change of Control occur within twelve months after your termination without Cause by the Company.
This Agreement will remain in effect until the later of (x) the last day of the Effective Period; or (y) if a Change of Control
occurs during the Effective Period, the date on which all benefits due to you under this Agreement, if any, have been paid.
However, this Agreement will expire earlier (i) upon the date that your employment is terminated by the Company for Cause
or by you without Good Reason or (ii) upon the first anniversary of the termination of your employment by the Company
without Cause if no Change of Control has occurred before such first anniversary.
Termination of Employment by Reason of Death or Disability. Your employment shall terminate automatically if you die
during the Change of Control Period. If the Company determines in good faith that you incurred a Disability during the
Change of Control Period, it may give you written notice, in accordance with Section 5 hereof, of its intention to terminate
your employment. In such event, your employment with the Company shall terminate effective on the thirtieth (30) calendar
day after your receipt of such notice if you have not returned to full-time duties within thirty (30) calendar days after such
receipt. If your employment is terminated for death or Disability during the Change of Control Period, this Agreement shall
terminate without further obligations on the part of the Company other than the obligation to pay to you or your
representative, as applicable, the following amounts:
a.
b.
c.
the Accrued Obligations, which shall be paid to you in a single lump sum cash payment within fifteen (15) calendar
days of the Date of Termination;
the Pro Rata Bonus, which shall be paid to you in a single lump sum cash payment no later than the later of (i) fifteen
(15) calendar days following the Date of Termination or (ii) the effective date of the Waiver and Release; and
the Other Benefits, which shall be paid in accordance with the terms and conditions of such plans, programs, policies,
arrangements or agreements.
Termination for Cause; Resignation Other Than for Good Reason. If your employment is terminated for Cause or you resign
for other than Good Reason during the Change of Control Period, your employment will terminate on the Date of
Termination in accordance with Section 5 hereof and this Agreement shall terminate without further obligations on the part
of the Company other than the obligation to pay to you the following:
a.
b.
the Accrued Obligations, which shall be paid to you in a single lump sum cash payment within fifteen (15) calendar
days of the Date of Termination; and
the Other Benefits, which shall be paid in accordance with the terms and conditions of such plans, programs or
policies.
Termination as a Result of an Involuntary Termination. In the event that your employment with the Company should
terminate during the Change of Control Period as a result of an Involuntary Termination, the Company will be obligated,
except as provided in Section 8 or Section 9 hereof, to provide you the following benefits:
a.
Severance Payment. The Company shall pay to you the following amounts:
2.
3.
4.
i.
ii.
iii.
iv.
v.
the Accrued Obligations, which shall be paid to you in a single lump sum cash payment within fifteen (15)
calendar days of the Date of Termination;
the Pro Rata Bonus, which shall be paid to you in a single lump sum cash payment no later than the later of
(A) fifteen (15) calendar days following the Date of Termination or (B) the effective date of the Waiver and
Release;
an amount equal to the product of (A) 2.0 times (B) the sum of (1) your Adjusted Base Salary plus (2) the
greater of (x) your Target Bonus or (y) the average of the annual bonuses paid or to be paid to you with
respect to the immediately preceding three (3) fiscal years, which amount shall be paid to you in a single lump
sum cash payment no later than the later of (i) fifteen (15) calendar days following the Date of Termination or
(ii) the effective date of the Waiver and Release;
if you had previously consented to the Company’s request to relocate your principal place of employment
more than forty (40) miles from its location immediately prior to the Change of Control, all unreimbursed
relocation expenses incurred by you in accordance with the Company’s relocation policies, which expenses
shall be paid to you in a single lump sum cash payment no later than the later of (A) fifteen (15) calendar days
following the Date of Termination or (B) the effective date of the Waiver and Release; and
the Other Benefits, which shall be paid in accordance with the then-existing terms and conditions of such
plans, programs or policies.
b.
Benefit Continuation. You and your then eligible dependents shall continue to be covered by and participate in the
group health and dental care plans (collectively, “Health Plans”) of the Company (at the Company’s cost) in which
you participated, or were eligible to participate, immediately prior to the Date of Termination through the end of the
Benefit Continuation Period; provided, however, that any medical or dental welfare benefit otherwise receivable by
you hereunder shall be reduced to the extent that you become covered under a group health or dental care plan
providing comparable medical and health benefits. You shall be eligible to participate in such Health Plans on terms
that are at least as favorable as those in effect immediately prior to the Date of Termination. However, in the event
that the terms of the Company’s Health Plans do not permit you to participate in those plans (other than pursuant to
an election under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”)), in lieu of your and
your eligible dependent’s coverage and participation under the Company’s Health Plans, the Company shall pay to
you within fifteen (15) calendar days after the effective date of the Waiver and Release a lump sum equal to two (2)
times your monthly COBRA premium amount for the number of months remaining in the Benefit Continuation
Period. In addition, for the purposes of coverage under COBRA, your COBRA event date will be the date of loss of
coverage described in this paragraph above.
c.
Outplacement Services. The Company shall, at its sole expense as incurred, provide you with outplacement services
on such terms and conditions as may be reasonably determined by the Company prior to the Change of Control.
d.
Acceleration of Stock Awards. All your outstanding awards of restricted stock, stock options, and other equity-based
compensation shall become fully vested and exercisable in full immediately upon the effective date of the Waiver and
Release; provided, however, that any such awards that would be out of the money as of the Date of Termination may
be terminated pursuant to Section 9(b) hereof. In addition, all of your outstanding awards of restricted stock, stock
options, and other equity-based compensation that are not assumed or substituted with awards of equivalent value in
connection with a Change of Control shall become fully vested and exercisable in full immediately upon the Change
of Control.
5.
Date and Notice of Termination. Any termination of your employment by the Company or by you during the Change of
Control Period shall be communicated by a notice of termination to the other party hereto (the “Notice of Termination”). The
Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the
provision so indicated. The date of your termination of employment with the Company (the “Date of Termination”) shall be
determined as follows: (i) if your employment is terminated for Disability, thirty (30) calendar days after a Notice of
Termination is received by you (provided that you shall not have returned to the full-time performance of your duties during
such thirty (30) calendar day period), (ii) if your employment is terminated by the Company in an Involuntary Termination,
the later of the date specified in the Notice of Termination or five (5) calendar days after the date the Notice of Termination
is received by you, (iii) if you terminate your employment for Good Reason, five (5) calendar days after the date the Notice
of Termination is received by the Company, and (iv) if your employment is terminated by the Company for Cause, the later
of the date specified in the Notice of Termination or five (5) calendar days following the date such notice is received by you.
The Date of Termination for a resignation of employment other than for Good Reason shall be the date set forth in the
applicable notice.
6.
No Mitigation or Offset; D&O Insurance.
a.
b.
No Mitigation or Offset. You shall not be required to mitigate the amount of any payment provided for herein by
seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for herein be
reduced by any compensation earned by you as the result of employment by another employer.
D&O Insurance, and Indemnification. Through at least the sixth anniversary of the Date of Termination, the
Company shall maintain coverage for you as a named insured on all directors’ and officers’ insurance maintained by
the Company for the benefit of its directors and officers on at least the same basis as all other covered individuals and
provide you with at least the same corporate indemnification as it provides to other senior executives.
Confidentiality. You agree to treat all Confidential Information as confidential information entrusted to you solely for use as
an employee of the Company, and shall not divulge, reveal or transmit any Confidential Information in any way to persons
not employed by the Company at any time from the date hereof until the end of time, whether or not you continue to be an
employee of the Company, unless authorized in writing by the Company.
Code Section 409A. The Agreement is not intended to constitute a "nonqualified deferred compensation plan" within the
meaning of Code Section 409A. Notwithstanding the foregoing, in the event this Agreement or any benefit paid under this
Agreement to you is deemed to be subject
7.
8.
to Code Section 409A, you consent to the Company's adoption of such conforming amendments as the Company deems
advisable or necessary, in its sole discretion (but without an obligation to do so), to comply with Code Section 409A and
avoid the imposition of taxes under Code Section 409A. This Agreement will be interpreted and construed to not violate
Code Section 409A, although nothing herein will be construed as an entitlement to or guarantee of any particular tax
treatment to you.
For purposes of this Agreement, a termination of employment means a "separation from service" as defined in Code Section
409A. Each payment made pursuant to any provision of this Agreement shall be considered a separate payment and not one
of a series of payments for purposes of Code Section 409A. While it is intended that all payments and benefits provided
under this Agreement to you will be exempt from or comply with Code Section 409A, the Company makes no representation
or covenant to ensure that the payments under this Agreement are exempt from or compliant with Code Section 409A. The
Company will have no liability to you or any other person or entity if a payment or benefit under this Agreement is
challenged by any taxing authority or is ultimately determined not to be exempt or compliant. You further understand and
agree that you will be entirely responsible for any and all taxes on any benefits payable to you as a result of this Agreement.
As a condition of participation in the Agreement, you understand and agree that you will never assert any claims against the
Company for reimbursement or payment of any Code Section 409A additional taxes, penalties and/or interest.
If upon your "separation from service" within the meaning of Code Section 409A, you are then a "specified employee" (as
defined in Code Section 409A), then solely to the extent necessary to comply with Code Section 409A and avoid the
imposition of taxes under Code Section 409A, the Company shall defer payment of "nonqualified deferred compensation"
subject to Code Section 409A payable as a result of and within six (6) months following such "separation from service"
under this Agreement until the earlier of (i) the first business day of the seventh month following your "separation from
service," or (ii) ten (10) days after the Company receives written confirmation of your death. Any such delayed payments
shall be made without interest. For avoidance of doubt, any payment whose amount is derived from the value of a Company
common share shall be calculated using the value of a common share as of the closing on the expiration date of the foregoing
Code Section 409A delay period.
To the extent any nonqualified deferred compensation payment to you could be paid in one or more of your taxable years
depending upon you completing certain employment-related actions, then any such payments will commence or occur in the
later taxable year to the extent required by Code Section 409A.
No reimbursement payable to you pursuant to any provisions of this Agreement or pursuant to any plan or arrangement of the
Company shall be paid later than the last day of the calendar year following the calendar year in which the related expense
was incurred, and no such reimbursement during any calendar year shall affect the amounts eligible for reimbursement in any
other calendar year, except, in each case, to the extent that it does not violate Code Section 409A.
Any reimbursement payable to you under this Agreement or pursuant to any plan or arrangement of the Company shall be
paid in accordance with the Company's established procedures provided, however, that to the extent necessary to comply
with Code Section 409A, the following requirements will be adhered to: (1) such reimbursement arrangements will provide
an objectively determinable nondiscretionary definition of the expenses eligible for reimbursement or of the in-kind benefits
to be provided, (2) such reimbursement arrangements will provide for the
reimbursement of expenses incurred or for the provision of the in-kind benefits during an objectively and specifically
prescribed period (including the lifetime of the service provider), (3) such reimbursement arrangements will provide that the
amount of expenses eligible for reimbursement, or in-kind benefits provided, during your taxable year may not affect the
expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year, (4) the reimbursement of
an eligible expense will be made on or before the last day of your taxable year following the taxable year in which the
expense was incurred, and (5) the right to reimbursement or in-kind benefits will not be subject to liquidation or exchange for
another benefit. Additionally, to the extent required by Code Section 409A, an eligible reimbursement expense must be
incurred by you no later than the end of the second year following the year in which your Date of Termination occurs and
any reimbursement payments to you must be made not later than the end of the third year following your Date of
Termination (or, in the case of in-kind benefits, by the end of the second year following your Date of Termination).
9.
Certain Reduction of Payments by the Company.
a.
b.
Best Net. Anything in this Agreement to the contrary notwithstanding, in the event that the independent auditors of
the Company (the “Accounting Firm”) determine that receipt of all payments or distributions in the nature of
compensation to or for your benefit, whether paid or payable pursuant to this Agreement or otherwise (“Payments”),
would subject you to tax under Section 4999 of the Code, the Payments paid or payable pursuant to this Agreement
(the “COC Payments”), including payments made with respect to equity-based compensation accelerated pursuant to
Section 4(d) hereof, but excluding payments made with respect to Sections 4(a)(i) and 4(a)(ii) hereof (except as
provided below), may be reduced (but not below zero) to the Reduced Amount, but only if the Accounting Firm
determines that the Net After-Tax Receipt of unreduced aggregate Payments would be equal to or less than the Net
After-Tax Receipt of the aggregate Payments as if the Payments were reduced to the Reduced Amount. If such a
determination is not made by the Accounting Firm, you shall receive all COC Payments to which you are entitled
under this Agreement.
Reduced Amount. If the Accounting Firm determines that Payments should be reduced to the Reduced Amount, the
Company shall promptly give you notice to that effect and a copy of the detailed calculation thereof. Absent manifest
error, all determinations made by the Accounting Firm under this Section 9 shall be binding upon you and the
Company and shall be made as soon as reasonably practicable and in no event later than twenty (20) business days
following the Change of Control Date, or such later date on which there has been a Payment. The reduction of the
Payments, if applicable, shall be made by reducing the payments and benefits hereunder in the following order, and
only to the extent necessary to achieve the Reduced Amount:
The Company shall reduce or eliminate the Payments, by first reducing or eliminating the portion of the Payments
which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order
beginning with payments or benefits which are to be paid the farthest in time from the determination.
All fees and expenses of the Accounting Firm in implementing the provisions of this Section 9 shall be borne by the
Company. To the extent requested by you, the Company shall cooperate with you in good faith in valuing services
provided or to be provided by
you (including without limitation, your agreeing to refrain from performing services pursuant to a covenant not to
compete or similar covenant) before, on or after the date of a change in ownership or control of the Company (within
the meaning of Q&A-2(b) of the Treasury Regulations adopted under Section 280G of the Code (the “Regulations”)),
such that payments in respect of such services may be considered reasonable compensation within the meaning of
Q&A-9 and Q&A-40 to Q&A-44 of the Regulations and/or exempt from the definition of the term “parachute
payment” within the meaning of Q&A-2(a) of the Regulations in accordance with Q&A-5(a) of the Regulations.
c.
Subsequent Adjustment. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the
initial determination by the Accounting Firm hereunder, it is possible that amounts will have been paid or distributed
by the Company to you or for your benefit pursuant to this Agreement which should not have been so paid or
distributed (“Overpayment”) or that additional amounts which will have not been paid or distributed by the Company
to you or for your benefit pursuant to this Agreement could have been so paid or distributed (“Underpayment”), in
each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accounting Firm,
based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or you that the
Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, you
shall pay any such Overpayment to the Company; provided, however, that no amount shall be payable by you to the
Company if and to the extent such payment would not either reduce the amount of taxes to which you are subject
under Sections 1 and 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm,
based upon controlling precedent or substantial authority, determines that an Underpayment has occurred, any such
Underpayment shall be paid promptly (and in no event later than sixty (60) days following the date on which the
Underpayment is determined) by the Company to you or for your benefit.
10.
Successors; Binding Agreement.
a.
b.
Assumption by Successor. The Company will require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume
and to agree to perform its obligations under this Agreement in the same manner and to the same extent that the
Company would be required to perform such obligations if no such succession had taken place; provided, however,
that no such assumption shall relieve the Company of its obligations hereunder. As used herein, the “Company” shall
mean the Company as hereinbefore defined and any successor to its business or assets as aforesaid which assumes
and agrees to perform its obligations by operation of law or otherwise.
Enforceability; Beneficiaries. This Agreement shall be binding upon and inure to the benefit of you (and your
personal representatives and heirs) and the Company and any organization which succeeds to substantially all of the
business or assets of the Company, whether by means of merger, consolidation, acquisition of all or substantially all
of the assets of the Company or otherwise, including, without limitation, as a result of a Change of Control or by
operation of law. This Agreement shall inure to the benefit of and be enforceable by your personal or legal
representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die
while any amount would still be payable to you hereunder if you had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee,
legatee or other designee or, if there is no such designee, to your estate.
11.
Definitions. For purposes of this Agreement, the following capitalized terms have the meanings set forth below:
a.
b.
c.
d.
e.
f.
g.
h.
“Accounting Firm” has the meaning assigned thereto in Section 9 hereof.
“Accrued Obligations” shall mean all compensation earned or accrued through the Date of Termination but not paid
as of the Date of Termination, including base salary, bonus for the prior performance year, accrued but unused
vacation, and reimbursement of business expenses accrued in accordance with the Company’s business expense
reimbursement policies.
“Adjusted Base Salary” means the greater of your base salary in effect immediately prior to (i) the Change of Control
Date or (ii) the Date of Termination.
“Agreement” has the meaning assigned thereto in the second introductory paragraph hereof.
“Benefit Continuation Period” means the period beginning on the Date of Termination and ending on the last day of
the month in which occurs the earlier of (i) the 24-month anniversary of the Date of Termination and (ii) the date on
which you elect coverage for you and your covered dependents under substantially comparable benefit plans of a
subsequent employer.
“Board” has the meaning assigned thereto in the first introductory paragraph hereof.
“Bonus Opportunity” for any performance year means your maximum cash bonus opportunity for that year, on the
assumption that the Company achieves all applicable performance targets and that you achieve all applicable
individual performance criteria.
“Cause” shall mean (i) your engaging in willful and continued failure to substantially perform your material duties
with the Company (other than due to becoming Disabled); provided, however, that the Company shall have provided
you with written notice of such failure and such failure is not cured by you within twenty (20) calendar days of such
notice; (ii) your engaging in misconduct that is materially and demonstrably injurious to the Company; (iii) your
conviction of, or plea of no contest to, a felony, other crime of moral turpitude; or (iv) a final non-appealable
adjudication in a criminal or civil proceeding that you have committed fraud. For purposes of the previous sentence,
no act or failure to act on your part shall be deemed “willful” if it is done, or omitted to be done, by you in good faith
and with a reasonable belief that it was in the best interest of the Company.
i.
“Change of Control” shall mean:
i.
any “person” (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)) becomes the beneficial
ii.
iii.
owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (A)
the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”)
or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote
generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that,
for purposes of this Section, the following acquisitions shall not constitute a Change of Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company, or (iv) any acquisition
pursuant to a transaction that complies with Sections 11(i)(iii)(A), (B), and (C);
during any period of two consecutive years (not including any period prior to the Effective Date), individuals
who at the beginning of such period constituted the Board and any new directors, whose election by the Board
or nomination for election by the Company’s stockholders was approved by a vote of at least three-fourths of
the directors then still in office who either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or
there is a consummation of a reorganization, merger, statutory share exchange or consolidation or similar
transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially
all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any
of its subsidiaries (each, a “Business Combination”), in each case unless, following such Business
Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to
such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding
shares of common stock (or, for a non-corporate entity, equivalent securities) and the combined voting power
of the then-outstanding voting securities entitled to vote generally in the election of directors (or, for a non-
corporate entity, equivalent governing body), as the case may be, of the entity resulting from such Business
Combination (including, without limitation, an entity that, as a result of such transaction, owns the Company
or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership immediately prior to such Business Combination of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be,
(B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit
plan (or related trust) of the Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 30% or more of, respectively, the then-outstanding shares of common
stock of the corporation resulting from such Business Combination or the combined voting power of the then-
outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the
Business Combination, and (C) at least a majority of the members of the board of directors (or, for a non-
corporate entity, equivalent governing body) of the entity resulting from such Business Combination were
members of the incumbent Board at the time of the execution of
j.
k.
l.
m.
n.
o.
p.
q.
r.
the initial agreement or of the action of the Board providing for such Business Combination.
“Change of Control Date” has the meaning assigned thereto in Section 1 hereof.
“Change of Control Period” has the meaning assigned thereto in the second introductory paragraph hereof.
“COC Payments” has the meaning assigned thereto in Section 9 hereof.
“Code” shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated
thereunder.
“Company” has the meaning assigned thereto in the first introductory paragraph hereof.
“Confidential Information” shall mean all financial information, trade secrets, personnel records, training and
operational manuals, records, contracts, lists, business procedures, business methods, accounts, brochures, and
handbooks that was learned or obtained by you in the course of your employment by the Company, and all other
documents relating to the Company or persons doing business with the Company that are proprietary to the Company.
“Date of Termination” has the meaning assigned thereto in Section 5 hereof.
“Disability” shall mean your incapacity due to physical or mental illness as defined in the long-term disability plan
sponsored by the Company or an affiliate of the Company for your benefit and which causes you to be absent from
the full-time performance of your duties.
“Effective Period” shall mean the period commencing on the date hereof (the “Effective Date”) and ending on the
third anniversary of the date of this Agreement; provided, however, that beginning on the third anniversary of the date
of this Agreement and on each one-year anniversary thereafter (each such date a “Renewal Date”), the Effective
Period shall be automatically extended for a period of two years beginning on such Renewal Date, unless at least sixty
(60) calendar days prior to such Renewal Date, the Company shall give notice that the Effective Period shall not be so
extended.
s.
“Good Reason” shall mean the occurrence of any of the following events or circumstances:
i.
ii.
a substantial adverse change in your title, position, offices, or the nature of your duties or responsibilities from
those in effect immediately prior to the Change of Control, or in the position, level, or status of the person to
whom you report.
a reduction by the Company in your annual base salary, Target Bonus, or benefits as in effect immediately
prior to the Change of Control or as the same may be increased from time to time thereafter, other than a
general reduction in benefits applicable across similarly situated executives within the Company;
iii.
iv.
a failure by the Company to pay you material compensation or benefits when due including, without
limitation, failure by the Company to pay any accrued relocation expenses or Other Benefits;
the relocation of the office of the Company where you are principally employed immediately prior to the
Change of Control to a location which is more than forty (40) miles from such office of the Company (except
for required travel on the Company’s business to an extent substantially consistent with your customary
business travel obligations in the ordinary course of business prior to the Change of Control); or any failure by
a successor to the Company to assume and agree to perform this Agreement, as contemplated by Section 10(a)
hereof, or any agreement with respect to your outstanding equity awards.
provided, however, that no event or condition set forth in subparagraphs (i) through (v) above shall constitute Good Reason unless
(x) you give the Company written notice of objection to such event or condition within sixty (60) calendar days of the initial
occurrence of such event or condition and (y) such event or condition is not corrected or remedied, in all material respects, by the
Company within thirty (30) calendar days of its receipt of such notice; and provided, further, however, that your mental or physical
incapacity following the occurrence of an event described above in subparagraphs (i) through (v) above shall not affect your ability
to terminate employment for Good Reason and that your death following delivery of a Notice of Termination shall not affect your
estate’s entitlement to the payments and benefits provided hereunder upon an Involuntary Termination. In order to qualify as a
termination of employment due to Good Reason, you must resign your employment for Good Reason within forty (40) calendar days
after you have provided the Company with the foregoing notice that a Good Reason event has occurred.
t.
u.
v.
w.
“Involuntary Termination” shall mean, during the Change of Control Period, (i) your termination of employment by
the Company without Cause or (ii) your resignation of employment with the Company for Good Reason.
“Net After-Tax Receipt” shall mean the present value (as determined in accordance with Section 280G(d)(4) of the
Code) of a Payment net of all taxes imposed on you with respect thereto under Sections 1 and 4999 of the Code and
under applicable state and local laws, determined by applying the highest marginal rate under Section 1 of the Code
and under state and local laws which applied to your taxable income for the immediately preceding taxable year, or
such other rate(s) as you certify as likely to apply to you in the relevant tax year(s).
“Notice of Termination” has the meaning assigned thereto in Section 5 hereof.
“Other Benefits” means, to the extent not theretofore paid or provided, any other amounts or benefits required to be
paid or provided to you or that you are eligible to receive under any plan, program, policy, practice, contract or
agreement of the Company in accordance with such applicable terms at the time of the Date of Termination. Nothing
herein shall prohibit the Company from changing, modifying, amending, or eliminating any benefit plans in
accordance with the terms of such plans prior to the Date of Termination, with or without prior notice.
x.
“Overpayment” has the meaning assigned thereto in Section 9 hereof.
y.
z.
aa.
ab.
ac.
ad.
ae.
“Pro Rata Bonus” means a pro rata portion of your Bonus Opportunity for the performance year in which the Date of
Termination occurs, calculated based on the number of days that you are employed in the performance year up
through and including the Date of Termination.
“Payment” has the meaning assigned thereto in Section 9 hereof.
“Reduced Amount” shall mean $1,000.00 less than the greatest amount of Payments that can be paid that would not
result in the imposition of the excise tax under Section 4999 of the Code.
“Severance Policy” means the Company’s Severance Policy for Key Executives as adopted on July 21, 2014 and as
may be amended from time to time.
“Target Bonus” for any year means your total cash target, but not maximum, bonus for that year, on the assumption
that the Company has achieved, but not exceeded, all applicable performance targets and that you have achieved, but
not exceeded, all applicable individual performance criteria.
“Underpayment” has the meaning assigned thereto in Section 9 hereof.
“Tax Authority” has the meaning assigned thereto in Section 9 hereof.
12.
13.
14.
Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in
writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return
receipt requested, postage prepaid, addressed to the Board of Directors, LKQ Corporation, 500 West Madison Street, Suite
2800, Chicago, IL 60661, with a copy to the General Counsel of the Company, or to you at the address set forth on the first
page of this Agreement or to such other address as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon receipt.
Release. As a condition to receiving any payments or benefits pursuant to this Agreement by reason of your death, Disability
or Involuntary Termination, you (or in the case of your death, the executor of your estate) must execute a waiver and release
of claims, including confidentiality and non-disparagement covenants, substantially in the form approved by the Company
prior to the Change of Control Date (as set forth on Exhibit B attached hereto) (a “Waiver and Release”), and such executed
Waiver and Release must be delivered to the Company (and not revoked by you) and become effective by its own terms no
later than 55 days after the later of (i) the Change of Control or (ii) the termination of your employment with the Company.
Arbitration. Any dispute or controversy arising under or in connection with this Agreement that cannot be mutually resolved
by the parties hereto shall be settled exclusively by arbitration in Chicago, Illinois under the employment arbitration rules of
the American Arbitration Association before one arbitrator of exemplary qualifications and stature, who shall be selected
jointly by the Company and you, or, if the Company and you cannot agree on the selection of the arbitrator, such arbitrator
shall be selected by the American Arbitration Association. Judgment may be entered on the arbitrator’s award in any court
having jurisdiction. The parties hereby agree that the arbitrator shall be empowered to enter an equitable decree mandating
specific enforcement of the terms of
this Agreement. The Company agrees to pay as incurred, to the fullest extent permitted by law, the costs and fees of the
arbitration, including all legal fees and expenses which you may reasonably incur as a result of any contest (regardless of the
outcome thereof) by the Company, you or others of the validity or enforceability of, or liability under, any provision of this
Agreement (including as a result of any contest by you about the amount of any payment pursuant to this Agreement), plus in
each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code.
15.
Miscellaneous.
a.
b.
c.
d.
e.
f.
Amendments, Waivers, Etc. No provision of this Agreement may be modified, waived or discharged unless such
waiver, modification or discharge is agreed to in writing. No waiver by either party hereto at any time of any breach
by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior
or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly set forth in this Agreement and this
Agreement shall supersede all prior agreements, negotiations, correspondence, undertakings and communications of
the parties, oral or written, with respect to the subject matter hereof. Notwithstanding the foregoing and for avoidance
of doubt, this Agreement does not supersede or replace the Severance Policy. However, any payments or benefits
provided (or to be provided) under this Agreement shall be reduced and offset by payments or benefits of the same
type that are received by you from the Company under the Severance Policy or any other severance arrangement.
Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in full force and effect.
Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an
original but all of which together will constitute one and the same instrument.
No Contract of Employment. Nothing in this Agreement shall be construed as giving you any right to be retained in
the employ of the Company or shall affect the terms and conditions of your employment with the Company prior to
the commencement of the Change of Control Period.
Withholding. Amounts paid to you hereunder shall be subject to all applicable federal, state and local withholding
taxes.
Source of Payments. All payments provided under this Agreement shall be paid in cash from the general funds of the
Company, and no special or separate fund shall be established, and no other segregation of assets made, to assure
payment. You will have no right, title or interest whatsoever in or to any investments which the Company may make
to aid it in meeting its obligations hereunder. To the extent that any person acquires a right to receive payments from
the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company.
g.
h.
i.
Headings. The headings contained in this Agreement are intended solely for convenience of reference and shall not
affect the rights of the parties to this Agreement.
Governing Law. This Agreement is governed by ERISA and, to the extent applicable, the laws of the State of
Delaware without regard to conflicts of law.
Effect on Benefit Plans. In the event of any inconsistency between the provisions of this agreement and the provisions
of any benefit plan of the Company, the provisions that are more favorable to you shall control.
By signing below, you acknowledge that this Agreement sets forth our agreement on the subject matter hereof. Kindly sign
and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject.
* * * * *
Sincerely,
LKQ CORPORATION
/s/ Victor M. Casini
By:
Name: Victor M. Casini
Title: Senior Vice President and General Counsel
Agreed to as of this January 31, 2020
/s/ Michael T. Brooks
Michael T. Brooks
Senior Vice President - Global Information Officer
The Agreement, including its Exhibits, constitutes both the official plan document and the required summary plan description
EXHIBIT A
under ERISA.
ELIGIBILITY
The Agreement is effective for the individual named in the Agreement (“you”).
BENEFITS
You shall be eligible for severance benefits at such times and in such amounts as may be specified in your Agreement.
OTHER IMPORTANT INFORMATION
A. Agreement Administration. As the Agreement Administrator, the Company has the full and sole discretionary authority
to administer and interpret the Agreement, including discretionary authority to determine eligibility for participation in and for
benefits under the Agreement, to determine the amount of benefits (if any) payable per participant, and to interpret any terms of this
document. All determinations by the Agreement Administrator will be final and conclusive upon all persons and be given the
maximum possible deference allowed by law. The Agreement Administrator is the “named fiduciary” of the Agreement for purposes
of ERISA and will be subject to the applicable fiduciary standards of ERISA when acting in such capacity. The Company may
delegate in writing to any other person all or a portion of its authority or responsibility with respect to the Agreement.
B. Source of Benefits. The Agreement is unfunded, and all severance benefits will be paid from the general assets of the
Company or its successor. No contributions are required under the Agreement.
C. Claims Procedure. If you believe you have been incorrectly denied a benefit or are entitled to a greater benefit than the
benefit you received under the Agreement, you may submit a signed, written application to the Company’s Senior Vice President of
Human Resources (“Claims Administrator”). You will be notified in writing of the approval or denial of this claim within ninety
(90) days of the date that the Claims Administrator receives the claim, unless special circumstances require an extension of time for
processing the claim. In the event an extension is necessary, you will be provided written notice prior to the end of the initial ninety
(90) day period indicating the special circumstances requiring the extension and the date by which the Claims Administrator expects
to notify you of approval or denial of the claim. In no event will an extension extend beyond ninety (90) days after the end of the
initial ninety (90) day period. If your claim is denied, the written notification will state specific reasons for the denial, make specific
reference to the Agreement provision(s) on which the denial is based, and provide a description of any material or information
necessary for you to perfect the claim and why such material or information is necessary. The written notification will also provide a
description of the Agreement’s review procedures and the applicable time limits, including a statement of your right to bring a civil
suit under section 502(a) of ERISA following denial of your claim on review.
You will have sixty (60) days from receipt of the written notification of the denial of your claim to file a signed, written
request for a full and fair review of the denial by a review panel which will be a named fiduciary of the Agreement for purposes of
such review. This request should include the reasons you are requesting a review and may include facts supporting your request and
any other relevant comments, documents, records and other information relating to your claim. Upon request and free of charge, you
will be provided with reasonable access to, and copies of, all documents, records and other information relevant
to your claim, including any document, record or other information that was relied upon in, or submitted, considered or generated in
the course of, denying your claim. A final, written determination of your eligibility for benefits shall be made within sixty (60) days
of receipt of your request for review, unless special circumstances require an extension of time for processing the claim, in which
case you will be provided written notice of the reasons for the delay within the initial sixty (60) day period and the date by which
you should expect notification of approval or denial of your claim. This review will take into account all comments, documents,
records and other information submitted by you relating to your claim, whether or not submitted or considered in the initial review of
your claim. In no event will an extension extend beyond sixty (60) days after the end of the initial sixty (60) day period. If an
extension is required because you fail to submit information that is necessary to decide your claim, the period for making the benefit
determination on review will be tolled from the date the notice of extension is sent to you until the date on which you respond to the
request for additional information. If your claim is denied on review, the written notification will state specific reasons for the denial,
make specific reference to the Agreement provision(s) on which the denial is based and state that you are entitled to receive upon
request, and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to your claim,
including any document, record or other information that was relied upon in, or submitted, considered or generated in the course of,
denying your claim. The written notification will also include a statement of your right to bring an action under section 502(a) of
ERISA.
If your claim is initially denied or is denied upon review, you are entitled to receive upon request, and free of charge,
reasonable access to, and copies of, any document, record or other information that demonstrates that (1) your claim was denied in
accordance with the terms of the Agreement, and (2) the provisions of the Agreement have been consistently applied to similarly
situated participants, if any. In pursuing any of your rights set forth in this section, your authorized representative may act on your
behalf.
If you do not receive notice within the time periods described above, whether on initial determination or review, you may
initiate a lawsuit under Section 502(a) of ERISA.
D. Indemnification. The Company agrees to indemnify its officers and employees and the members of the Board of
Directors of the Company from all liabilities from their acts or omissions in connection with the administration, amendment or
termination of the Agreement, to the maximum extent permitted by applicable law.
E. Severability. If any provision of the Agreement is held invalid or unenforceable, its invalidity or unenforceability will not
affect any other provision of the Agreement, and the Agreement will be construed and enforced as if such provision had not been
included.
F. Headings. Headings in the Agreement are for purposes of reference only and will not limit or otherwise affect the
meaning hereof.
STATEMENT OF ERISA RIGHTS
As a participant in the Agreement you are entitled to certain rights and protections under ERISA. ERISA provides that all
Agreement participants shall be entitled to:
A. Receive Information About Your Agreement and Benefits
Examine, without charge, at the Agreement Administrator’s office and at other specified locations, such as work sites, all
documents governing the Agreement.
Obtain, upon written request to the Agreement Administrator, copies of documents governing the operation of the
Agreement. The Agreement Administrator may impose a reasonable charge for the copies.
B. Prudent Actions by Agreement Fiduciaries
In addition to creating rights for Agreement participants, ERISA imposes duties upon the people who are responsible for the
operation of the employee benefit plan. The people who operate your Agreement, called “fiduciaries” of the Agreement, have a duty
to do so prudently and in the interest of you and other Agreement participants and beneficiaries. No one, including your employer or
any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a welfare benefit or
exercising your rights under ERISA.
C. Enforce Your Rights
If your claim for a welfare benefit is denied or ignored, in whole or in part, you have a right to know why this was done, to
obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules.
Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request a copy of Agreement
documents and do not receive it within 30 days, you may file suit in a federal court. In such a case, the court may require the
Agreement Administrator to provide the materials and pay you up to $110.00 per day until you receive the materials, unless the
materials were not sent because of reasons beyond the control of the Agreement Administrator. If you have a claim for benefits
which is denied or ignored, in whole or in part, you may file suit in a state or federal court after you have completed the Agreement's
administrative appeals process. If you are discriminated against for asserting your rights, you may seek assistance from the U.S.
Department of Labor, or you may file suit in a federal court. The court will decide who should pay court costs and legal fees. If you
are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay
these costs and fees, for example, if it finds your claim is frivolous.
D. Assistance With Your Questions
If you have any questions about the Agreement, you should contact the Agreement Administrator. If you have any questions
about this statement or about your rights under ERISA, or if you need assistance in obtaining documents from the Agreement
Administrator, you should contact the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor,
listed in your telephone directory, or the Division of Technical Assistance and Inquiries, Employee Benefits Security
Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210. You may also obtain certain
publications about your rights and responsibilities under ERISA by calling the publications hotline of the Employee Benefits
Security Administration.
ADDITIONAL AGREEMENT INFORMATION
Name of Agreement:
Change of Control Agreement
Employer Sponsoring Agreement:
Employer Identification Number:
LKQ Corporation.
500 West Madison Street, Suite 2800, Chicago, IL 60661
36-4215970
Agreement Number:
Agreement Year:
529
Calendar Year
Agreement Administrator:
Agent for Service of Legal Process:
LKQ Corporation
c/o Senior Vice President of Human Resources
500 West Madison Street, Suite 2800, Chicago, IL 60661
Telephone No. (312) 621-1950
Agreement Administrator, at the above address
Type of Agreement:
Agreement Costs:
Employee Welfare Benefit Plan providing for severance benefits
The cost of the Agreement is paid by LKQ Corporation
Type of Administration:
Self-administered by the Agreement Administrator
EXHIBIT B
WAIVER AND GENERAL RELEASE AGREEMENT
This Waiver and Release Agreement (this “Release”) is entered into as of the date indicated on the signature page of this
Release by and between LKQ Corporation, a Delaware corporation (the “Company”) and (“Employee”). Employee has been
employed by the Company, and the parties are entering into this Release because the employment relationship is ending, without
fault or wrongdoing on the part of either the Company or Employee, who agree as follows:
1.
Release.
a.
In exchange for the valuable consideration set forth in the Change of Control Agreement dated as of ____________
___, 20___ (the “Letter Agreement”), between Employee and the Company, the receipt and adequacy of which are
herein acknowledged, Employee hereby agrees to release and forever discharge the Company and its present, former
and future partners, shareholders, affiliates, direct and indirect parents, subsidiaries, successors, directors, officers,
employees, agents, attorneys, heirs and assigns (the “Released Parties”), from any and all claims, actions and causes
of action (the “Claims”) arising out of (i) his employment relationship with and service as an employee of the
Company and its affiliates, and the termination of such relationship or service, or (ii) any event, condition,
circumstance or obligation that occurred, existed or arose on or prior to the date hereof, including, but not limited to
any Claims under Title VII of the Civil Rights Act of 1964, the Rehabilitation Act of 1973, the Americans With
Disabilities Act of 1990, the Civil Rights
Act of 1866, the Civil Rights Act of 1991, the Employee Retirement Income Security Act of 1974 (ERISA), the
Family and Medical Leave Act of 1993, the California Fair Employment and Housing Act; the California Workers’
Compensation Act; the California Unruh and Ralph Civil Rights Laws; the California Alcohol and Drug
Rehabilitation Law and any other federal, state or local law, statute, regulation or ordinance, or law of any foreign
jurisdiction, whether such Claim arises under statute or common law and whether or not Employee is presently aware
of the existence of such Claim. Employee also forever releases, discharges and waives any right he may have to
recover in any proceeding brought by any federal, state or local agency against the Released Parties to enforce any
laws. To ensure that this Release is fully enforceable in accordance with its terms, Employee agrees to waive any and
all rights to any Claims, whether or not he knows or suspects them to exist in his favor, which if known to him would
have materially affected his execution of this Release. Notwithstanding the foregoing, this Release does not apply to
Employee’s rights, claims, or benefits under the Letter Agreement or to Employee’s rights, if any, to payment of
benefits pursuant to any employee benefit plan. This Release also does not apply to Employee’s rights, claims, or
benefits claims for unemployment compensation benefits, workers compensation benefits, claims under the Fair
Labor Standards Act, health insurance benefits under the Consolidated Omnibus Budget Reconciliation Act
(COBRA), or claims with regard to vested benefits under a retirement plan governed by ERISA.
b.
To ensure that this Release is fully enforceable in accordance with its terms, Employee hereby agrees to waive
any and all rights under Section 1542 of the California Civil Code (to the extent applicable) as it exists from
time to time, which provides:
A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must have materially affected his settlement with the debtor.
In addition, to ensure that this Release is fully enforceable in accordance with its terms, Employee hereby agrees to waive
any protection that may exist under any comparable or similar statute and under any principle of common law of the United States or
any and all States.
EMPLOYEE UNDERSTANDS THAT, BY SIGNING THIS RELEASE, EMPLOYEE WILL HAVE WAIVED ANY
RIGHT THAT HE MAY HAVE TO BRING A LAWSUIT OR MAKE ANY CLAIM AGAINST THE COMPANY AND
THE RELEASED PARTIES BASED ON ANY ACT OR OMISSIONS BY THEM UP TO THE DATE OF SIGNING THIS
AGREEMENT.
c.
In further consideration of the payments and benefits provided to Employee under the Letter Agreement, Employee
hereby releases and forever discharges the Released Parties from any and all Claims that he may have as of the date
he signs this Release arising under the federal Age Discrimination in Employment Act of 1967, as amended, and the
applicable rules and regulations promulgated thereunder (“ADEA”). By signing this Release, Employee hereby
acknowledges and confirms the following: (i) he was advised by the Company in connection with his termination to
consult with an attorney of his choice prior to signing this Release and to have such attorney explain to him the terms
of this Release, including, without limitation, the terms relating to his release of claims arising under the ADEA; (ii)
if Employee is 40 years of age or older as of the date of execution of this Release, he was given a period of not fewer
than 21 calendar days to consider the terms of this Release and to consult with an attorney of his choosing with
respect thereto;
(iii) he is providing the release and discharge set forth in this Paragraph 1(c) only in exchange for consideration in
addition to anything of value to which he is already entitled and (iv) he can revoke this Release without it becoming
effective as described below.
No Legal Claim. Employee has not commenced any legal action, which term includes, without limitation, any demand for
arbitration proceedings and any charge, complaint, filing or submission with any federal, state or local agency, court or other
tribunal, to assert any Claim against a Released Party, and covenants and agrees not to do so in the future with respect to the
matters released herein. If Employee commences or joins any legal action against a Released Party, Employee agrees that
such an action is prohibited by this Release, and further agrees to promptly indemnify such Released Party for its reasonable
costs and attorneys fees incurred in defending such action as well as forfeit or return any monetary judgment obtained by
Employee against any Released Party in such action. Nothing in this Paragraph 2 is intended to reflect any party’s belief that
Employee’s waiver of claims under the ADEA is invalid or unenforceable under this Release, it being the intent of the parties
that such claims are waived.
Nondisparagement. Employee agrees to refrain, except as required by law or in connection with a judicial proceeding, from
making directly or indirectly, now or at any time in the future, any written or oral statements, representations or other
communications that disparage or are otherwise damaging to the business or reputation of the Released Parties.
Continuing Obligations. This Release shall not supersede any continuing obligations Employee may have under the terms of
the Letter Agreement or any other agreement between Employee and the Company.
Disclaimer. Employee hereby certifies that Employee has read the terms of this Release, that Employee has been advised by
the Company to consult with an attorney of Employee’s own choice prior to executing this Release, that Employee has had
an opportunity to do so, and that Employee understands the provisions and consequences of this Release. Employee further
certifies that the Company has not made any representation to Employee concerning this Release other than those contained
herein.
Governing Law. This Release is governed by ERISA and, to the extent applicable, the laws of the State of Delaware without
regard to conflicts of law.
Separability of Clauses. If any provisions of this Release shall be finally determined to be invalid or unenforceable under
applicable law by a court of competent jurisdiction, that part shall be ineffective to the extent of such invalidity or
unenforceability only, without in any way affecting the remaining provisions of this Release.
Counterparts. This Release may be executed by the parties hereto in counterparts, each of which shall be deemed an original,
but both such counterparts shall together constitute one and the same document.
Effectiveness. This Release shall be effective only when it has been executed by Employee and the executed original has
been returned to the Company, and any applicable revocation period has expired.
2.
3.
4.
5.
6.
7.
8.
9.
IN WITNESS WHEREOF, the Company has caused this Release to be signed by its duly authorized officer, and Employee
has executed this Release as of the day and year indicated below Employee’s signature.
LKQ CORPORATION
By:
Name:
Title:
If Employee is 40 years of age or older as of the date of execution of this Release, Employee shall have the right to revoke this
Release during the seven-day period (the “Revocation Period”) commencing immediately following the date he signs and
delivers this Release to the Company. The Revocation Period shall expire at 5:00 p.m. [INSERT TIME ZONE] Time on the
last day of the Revocation Period; provided, however, that if such seventh day is not a business day, the Revocation Period
shall extend to 5:00 p.m. on the next succeeding business day. In the event Employee revokes this Release, all obligations of
the Company under this Release and under any agreement which are conditional upon this Release shall terminate and be of
no further force and effect as of the date of such revocation. No such revocation by Employee shall be effective unless it is in
writing and signed by him and received by the Company prior to the expiration of the Revocation Period at the following
address:
LKQ Corporation
ATTN: General Counsel
500 W. Madison Street, Suite 2800
Chicago, IL 60661
I HAVE READ AND AGREE
TO THIS RELEASE:
Name:
Date:
LIST OF SUBSIDIARIES OF LKQ CORPORATION (as of December 31, 2019)
Exhibit 21.1
Subsidiary
Jurisdiction
Assumed Names
U.S. Enitites
A&A Auto Parts Stores, Inc.
AIM Recycling Florida, LLC (50.01% stake)
American Recycling International, Inc.
A-Reliable Auto Parts & Wreckers, Inc.
Assured Quality Testing Services, LLC
Automotive Calibration & Technology Services, LLC
AutoTech Fund I L.P. (8.25% stake)
Ecology Recycling Services, LLC (33.33% stake)
DriverFx.com, Inc.
Global Powertrain Systems, LLC
KAIR IL, LLC
KAO Logistics, Inc
KAO Warehouse, Inc.
Keystone Automotive Industries, Inc.
Keystone Automotive Operations, Inc.
Keystone Automotive Operations of Canada, Inc.
KPGW Canadian Holdco, LLC
Lakefront Capital Holdings, LLC
LKQ 1st Choice Auto Parts, LLC
LKQ 250 Auto, Inc.
LKQ All Models Corp.
LKQ Apex Auto Parts, Inc.
LKQ Auto Parts of Central California, Inc.
LKQ Auto Parts of Memphis, Inc.
LKQ Auto Parts of North Texas, Inc.
LKQ Auto Parts of North Texas, L.P.
LKQ Auto Parts of Utah, LLC
LKQ Best Automotive Corp.
LKQ Brad’s Auto & Truck Parts, Inc.
LKQ Central, Inc.
LKQ Corporation
LKQ Delaware LLP
LKQ Foster Auto Parts Salem, Inc.
Pennsylvania
Delaware
California
Illinois
Delaware
Delaware
Delaware
California
Delaware
Delaware
Illinois
Pennsylvania
Delaware
California
Pennsylvania
Delaware
Delaware
California
Oklahoma
Ohio
Arizona
AIM Recycling West Palm; AIM Recycling Medley; AIM Recycling
Davie
Pick A Part Auto Dismantling
LKQ Self Service Auto Parts-Rockford; LKQ Heavy Duty Truck
ARSCO; LKQ Heavy Duty Truck Core; LKQ Pick Your Part
Rockford; LKQ Pick Your Part Chicago Heights
Transwheel, Coast to Coast International; LKQ of Cleveland;
Keystone Automotive-San Francisco Bay Area; Chrome
Enhancements
Wholesale Auto Recyclers; Cars ‘n More; LKQ of Arizona
Oklahoma
LKQ Self Service Auto Parts - Oklahoma City
California
Arkansas
Delaware
Delaware
Utah
Delaware
Oregon
Delaware
Delaware
Delaware
Oregon
LKQ Valley Truck Parts; LKQ Specialized Auto Parts; LKQ ACME
Truck Parts; All Engine Distributing
LKQ of Tennessee; LKQ Preferred
LKQ Auto Parts of Central Texas; LKQ Self Service Auto Parts-
Austin
LKQ Auto Parts of South Texas; A-1 Auto Salvage Pick & Pull; The
Engine & Transmission Store; LKQ Automotive Core Services;
LKQ International Sales; LKQ of El Paso
Foster Auto Parts Salem
Subsidiary
Jurisdiction
Assumed Names
LKQ Foster Auto Parts, Inc.
LKQ Great Lakes Corp.
LKQ Heavy Truck-Texas Best Diesel, L.P.
LKQ Investments, Inc.
LKQ Lakenor Auto & Truck Salvage, Inc.
LKQ Metro, Inc.
LKQ Midwest, Inc.
LKQ Midwest Auto Parts Corp.
LKQ Minnesota, Inc.
LKQ of Indiana, Inc.
LKQ of Michigan, Inc.
LKQ of Nevada, Inc.
LKQ Northeast, Inc.
LKQ Pick Your Part Southeast, LLC
LKQ Receivables Finance Company, LLC
LKQ Self Service Auto Parts-Holland, Inc.
LKQ Self Service Auto Parts-Kalamazoo, Inc.
LKQ U-Pull-It Auto Wrecking; U-Pull-It Auto Wrecking; LKQ
Barger Auto Parts; LKQ KC Truck Parts-Inland Empire; LKQ KC
Truck Parts-Western Washington; LKQ KC Truck Parts-Montana;
LKQ Wholesale Truck Parts; LKQ of Eastern Idaho
LKQ Star Auto Parts; LKQ Chicago; LKQ Self Service Auto Parts-
Milwaukee
LKQ Fleet Solutions
LKQ of Southern California; LKQ of Las Vegas; LKQ Parts Outlet-
Los Angeles
Midwest Foreign Auto; LKQ Midwest Auto; LKQ Auto Parts of
Lincoln
LKQ Albert Lea
LKQ Self Service Auto Parts-South Bend; LKQ Kentuckiana; LKQ
Pick Your Part
LKQ Thruway Auto Parts; LKQ Venice Auto Parts; LKQ Triple
Nickel Trucks
LKQ Self Service Auto Parts-Orlando; LKQ Pick Your Part
LKQ Pick Your Part
LKQ Self Service Auto Parts-Grand Rapids; LKQ Pick Your Part
Oregon
Indiana
Texas
Delaware
California
Illinois
Delaware
Nebraska
Minnesota
Indiana
Michigan
Nevada
Delaware
Delaware
Delaware
Michigan
Michigan
LKQ Self Service Auto Parts-Tulsa, Inc.
Oklahoma
LKQ Pick Your Part
LKQ Southeast, Inc.
LKQ Southwick LLC
LKQ Taiwan Holding Company
LKQ Trading Company
LKQ TriplettASAP, Inc.
LKQ West Michigan Auto Parts, Inc.
North American ATK Corporation
PGW Auto Glass, LLC
Pick-Your-Part Auto Wrecking
Potomac German Auto, Inc.
LKQ Fort Myers; LKQ Heavy Truck-Tampa; LKQ Pick Your Part;
LKQ Gulf Coast; LKQ Plunks Truck Parts & Equipment - West
Monroe; LKQ of Carolina; LKQ Richmond; LKQ East Carolina;
LKQ Self Service East NC ; LKQ Self Service Auto Parts-Charlotte;
LKQ Pick Your Part; LKQ Heavy Duty Truck Charlotte; LKQ
Heavy Duty Truck-Universal Truck Parts; LKQ Heavy Truck-
Universal; LKQ Melbourne; LKQ North Florida; LKQ South
Florida; LKQ West Florida;
LKQ Heavy Truck-Goody's; LKQ Pittsburgh; LKQ Pick Your Part;
Cockrell's Auto Parts
LKQ Pick A Part-San Bernardino; LKQ Midnight Auto & Truck
Recyclers; LKQ Pick A Part-Hesperia; LKQ Desert High Truck &
Auto Recyclers; LKQ Pick A Part-Riverside; LKQ Hillside Truck &
Auto Recyclers
LKQ Norfolk; LKQ Heavy Truck-Maryland
Delaware
Massachusetts
Illinois
Delaware
Ohio
Michigan
California
Delaware
California
Maryland
Subsidiary
Jurisdiction
Assumed Names
Pull-N-Save Auto Parts, LLC
Redding Auto Center, Inc.
Rydell Motor Company, LLC (1% stake)
Scrap Processors, LLC
U-Pull-It, Inc.
U-Pull-It, North, LLC
Warn Industries, Inc.
Colorado
California
Iowa
Illinois
Illinois
Illinois
Delaware
LKQ Pull-N-Save Auto Parts of Aurora LLC; LKQ of Colorado;
LKQ Self Service Auto Parts-Denver; LKQ Western Truck Parts
LKQ Auto Parts of Northern California; LKQ Reno; LKQ
Specialized Parts Planet; LKQ ACME Truck Parts; LKQ Auto Sales
of Rancho Cordova
LKQ PickYour Part Blue Island
LKQ Pick Your Part
Subsidiary
Jurisdiction
Assumed Names
Foreign Entities
1323352 Alberta ULC
1323410 Alberta ULC
Ageres B.V.
Alfa Paints B.V.
Alberta
Alberta
Netherlands
Netherlands
Andrew Page 1917 Limited
England & Wales
Annex-Technik GmbH (subsidary of PV Automotive GmbH)
Germany
AP Logistics Belgie NV (Sator Holding B.V. 71% share & Fource
Services 29% share)
AP Logistics B.V.
APM Automotive s.r.o.
Aquafax Limited
Arleigh Group Limited
Arleigh International Limited
A.S.A.P. Supplies Limited
Belgium
Netherlands
Czech Republic
England & Wales
England & Wales
England & Wales
England & Wales
ATR International AG (2% stake; 20% subsidary of Auto-Teile-
Ring)
Germany
Autoteileland AL GmbH (subsidary of PV Automotive GmbH)
Germany
Auto-Teile-Ring-GmbH (37.5% stake)
Atracco AB
Atracco AS
Atracco Auto AB
Atracco Group AB
Atracco Tromso AS
Auto Kelly a.s.
Auto Kelly Slovakia s.r.o.
Automotive Academy B.V.
Automotive Data Services Limited
Germany
Sweden
Norway
Sweden
Sweden
Czech Republic
Slovakia
Netherlands
England & Wales
Autoteile Supermarkt GmbH (59% subsidiary of Neimke Holding)
Germany
Auto Wessel B.V.
Belgian Carparts Corporation CVBA
Blue Moose Holdings Ltd.
B.M. S.r.l.
BRUNN GmbH (subsidary of PV Automotive GmbH)
Car Parts 4 Less Limited
Netherlands
Belgium
England & Wales
Italy
Germany
England & Wales
Subsidiary
Car Systems B.V.
Centro Ricambi Rhiag S.r.l.
Jurisdiction
Netherlands
Italy
Assumed Names
Commercial Parts UK Holdco Limited (25% stake)
England & Wales
CZ Aftermarket Holding GmbH (51.8% stake)
Germany
Digraph Transport Supplies Limited (subsidiary of Commercial
Parts UK Holdco Limited)
Distribuidora Hermanos Copher Internacional, SA
ECP France SAS
ELIT CZ, Spol s.r.o.
Elit Group Ltd.
Elit Kar OOD (20% stake)
ELIT Polska sp.z.o.o.
ELIT Slovakia s.r.o.
ELIT Ukraine LLC
Era S.r.l.
Euro Car Parts Ireland Limited
Euro Car Parts Limited
Euro Car Parts Nordic AB
Euro Car Parts (Northern Ireland) Limited
Euro Garage Solutions Ltd
Fource Automotive BV
Fource BV
Fource Holding B.V.
Fource Project B.V.
Fource Services B.V.
GHS Automotive B.V.
Harrems Tools B.V.
Harrems Tools N.V. (Harrems Tools B.V. 95% stake & Fource
Services 5% stake)
Hartsant Crash Repair Bvba
heptus 292. GmbH
Heuts Beheer B.V.
Heuts DHZ B.V.
HF Services B.V.
HF Services BVBA (Van Heck Interpieces NV 99.9% share &
Fource Holding B.V. 0.1%)
I4B Sp.z.o.o. (51.2% subsidary of Optimal AG & Co. KG)
England & Wales
Guatemala
France
Czech Republic
Switzerland
Bulgaria
Poland
Slovakia
Ukraine
Italy
Ireland
England & Wales
Sweden
Northern Ireland
England & Wales
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Belgium
Belgium
Germany
Netherlands
Netherlands
Netherlands
Belgium
Poland
In2-Connect Platform Limited
In2 Developments Limited
In2 Management Group Limited
England & Wales
England & Wales
England & Wales
Subsidiary
IPAR Industrial Partners B.V.
inSiamo Scarl (24.32% stake)
J. Elmer s.r.o.
JCA Coatings Limited
Karkraft (N.I.) Limited
Karstorp Bildemontering AB
Keystone Automotive de Mexico, Sociedad de Responsabilidad
Limitada de Capital Variable
Assumed Names
Jurisdiction
Netherlands
Italy
Czech Republic
England & Wales
Northern Ireland
Sweden
Mexico
Keystone Automotive Industries ON, Inc.
Canada (Federal)
Klaus Autozubehor Grosshandel GmbH (30% stake)
Láng Kft.
LKQ Belgium BVBA
LKQ Canada Auto Parts Inc.
LKQ Euro Limited
LKQ Europe GmbH
LKQ European Holdings B.V.
LKQ European Services B.V.
LKQ German Holdings GmbH
LKQ India Private Limited
LKQ Italia S.r.l.
LKQ Italia Bondco S.p.A.
LKQ Netherlands B.V.
LKQ Ontario LP
Marine Mart Limited
Markesdemo AB (7.04% stake)
Matorit Data AB
Mekonomen AB (26.5% stake)
Messmer GmbH
Midland Chandlers Limited
Milano Distribuzione 2 S.r.l.
Motorparts S.r.l.
M.P.M. International Oil Company B.V.
Germany
Hungary
Belgium
Canada (Federal)
Ireland
Switzerland
Netherlands
Netherlands
Germany
India
Italy
Italy
Netherlands
Ontario
England & Wales
Sweden
Sweden
Sweden
Germany
England & Wales
Italy
Italy
Netherlands
MTS Marken Technik Service GmbH & Co. KG (2.57% subsidary
of PV Automotive GmbH)
Germany
MTS Marken Technik Service Verwaltungs GmbH (subsidary of
MTS Marken Technik Service GmbH & Co. KG)
Germany
Neimke AT GmbH & Co. KG (subsidiary of Neimke GmbH & Co.
KG)
Austria
Neimke AT Verwaltungs GmbH (subsidiary of Neimke GmbH &
Co. KG)
Austria
Neimke Geschaftsfuhrungs-und Verwaltungs GmbH (74% stake)
Germany
Subsidiary
Jurisdiction
Assumed Names
Neimke GmbH & Co. KG (74% stake)
Germany
Neimke Holding GmbH (subsidiary of Neimke GmbH & Co. KG)
Germany
Nipparts B.V.
Nipparts Deutschland GmbH
Nova Leisure Limited
NPR Auto Trading Limited
NTP/Stag Canada Inc.
Obdo Forvaltning AB
Orebro Bildemontering AB
Optimal AG & Co. KG
Netherlands
Germany
England & Wales
Ireland
Canada (Federal)
Sweden
Sweden
Germany
Optimal Asia Ltd. (60% subsidary of Optimal AG & Co. KG)
Hong Kong
Optimal Benelux Bvba (60.75% subsidary of Optimal AG & Co.
KG)
Optimal France S.a.r.l. (subsidary of Optimal AG & Co. KG)
Optimal Istanbul Yedek Parca Otomotiv Sanayi Ve Ticaret A.S.
(95% subsidary of Optimal AG & Co. KG)
Optimal Otomotiv Dis Ticaret A.S. (subsidary of Optimal AG &
Co. KG)
Optimal Polska Sp.z.o.o. (51% subsidary of Optimal AG & Co.
KG)
Belgium
France
Turkey
Turkey
Poland
Optimalrecambio Cia Ltda. (51% subsidary of Optimal Recambios
S.L)
Ecuador
Optimal Recambios S.L. (26.4% subsidary of Optimal AG & Co.
KG)
Spain
Optimal UK Distribution Limited (80% subsidary of Optimal AG
& Co. KG)
England & Wales
Optimal Verwaltungs AG (subsidary of Optimal AG & Co. KG)
Germany
Pala Holding, B.V.
Netherlands
Partslife GmbH (2.27% subsidary of PV Automotive GmbH)
Germany
PGW Auto Glass, ULC
Pika Autoteile GmbH
PV Automotive GmbH (66.67% stake)
PV Technik GmbH (subsidary of PV Automotive GmbH)
Nova Scotia
Germany
Germany
Germany
Q-Parts24 GmbH & Co. KG (51% subsidary of Optimal AG & Co.
KG)
Germany
Q-Parts24 Verwaltstungs GmbH (subsidary of Q-Parts24 GmbH &
Co. KG)
Recopart AB
Rhiag Group Ltd.
Rhiag-Inter Auto Parts Italia S.r.l.
Rhiag Services Slovakia s.r.o.
Rhino BidCo S.r.l.
Germany
Sweden
Switzerland
Italy
Slovakia
Italy
Subsidiary
Rijsbergen Automotive BV
Rijsbergen CarTAL Beheer B.V.
S.C. ELIT Romania S.r.l.
SiM Impex d.o.o.
Spectrum Verf B.V.
Stahlgruber Beteilligungsgesellschaft mbH
Stahlgruber Communication Center GmbH
Stahlgruber d.o.o.
Stahlgruber S.r.l.
Stahlgruber Gesellschaft m.b.H.
Stahlgruber GmbH
Stahlgruber Holding GmbH
Stahlgruber trgovina d.o.o. (51% stake)
Stahlgruber trgovina d.o.o.
Stahlgruber CZ s.r.o.
Starmann Sp.z.o.o. Kolobrzeg (51% subsidary of Optimal AG &
Co. KG)
Sztarman Ukraine Sp.z.o.o. (67% subsidary of Starmann Sp.z.o.o.
Kolobrzeg)
Upplands Bildemontering AB
Valla Bildemontering AB
Vanesch Verf Belgie B.V.
Vanesch Verf Groep B.V.
Vanesch Verf Nederland B.V.
Van Heck Interpieces N.V. (71% Fource Holding B.V & 29%
Fouce Services B.V.)
Van Heck Interpieces France S.A.S.
Van Heck Vastgoed B.V.
Vaxjo Lackcenter AB
VEGE AUTOMOTIVE SPAIN, S.L.U.
VEGECOM S.A.R.L. (subsidary of VEGE Moteurs S.A.)
Vége de Mexico S.A. de C.V.
VEGE Moteurs S.A. (subsidary of Intermotor B.V.)
Vege-Motodis S.A. de C.V.
Vehicle Data Services Limited
Verfhandel Willy Pijnenborg B.V.
Widells Bilplat Eftr AB
Jurisdiction
Assumed Names
Netherlands
Netherlands
Romania
Bosnia and
Herzegovina
Netherlands
Germany
Germany
Croatia
Italy
Austria
Germany
Germany
Croatia
Slovenia
Czech Republic
Poland
Ukraine
Sweden
Sweden
Belgium
Netherlands
Netherlands
Belgium
France
Netherlands
Sweden
Spain
Tunisia
Mexico
Tunisia
Mexico
England & Wales
Netherlands
Sweden
WJCM de Mexico, Sociedad de Responsabilidad Limitada de
Capital Variable
Mexico
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We consent to the incorporation by reference in Registration Statement Nos. 333-110149, 333-128151, and 333-174450 on Form S-8, Registration Statement No.
333-226148 on Form S-3, and Registration Statement Nos. 333-193585, 333-133911 and 333-160395 on Form S-4 of our reports dated February 27, 2020, relating
to the consolidated financial statements and financial statement schedule of LKQ Corporation and subsidiaries, and the effectiveness of LKQ Corporation and
subsidiaries’ internal control over financial reporting, appearing in this Annual Report on Form 10-K of LKQ Corporation for the year ended December 31, 2019.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 27, 2020
Exhibit 31.1
I, Dominick Zarcone, certify that:
1.
I have reviewed this annual report on Form 10-K of LKQ Corporation;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
February 27, 2020
/s/ DOMINICK ZARCONE
Dominick Zarcone
President and Chief Executive Officer
Exhibit 31.2
I, Varun Laroyia, certify that:
1.
I have reviewed this annual report on Form 10-K of LKQ Corporation;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
February 27, 2020
/S/ VARUN LAROYIA
Varun Laroyia
Executive Vice President and Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of LKQ Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2019, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, as President and Chief Executive Officer of the Company, hereby
certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));
and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 27, 2020
/S/ DOMINICK ZARCONE
Dominick Zarcone
President and Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of LKQ Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2019, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, as Executive Vice President and Chief Financial Officer of the Company,
hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));
and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 27, 2020
/S/ VARUN LAROYIA
Varun Laroyia
Executive Vice President and Chief Financial Officer