Published: 2022-05-04 00:00:00 ET

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LKQ Corporation, a Delaware corporation, is a holding company and all operations are conducted by subsidiaries. When the terms "LKQ," "the Company," "we," "us," or "our" are used in this document, those terms refer to LKQ Corporation and its consolidated subsidiaries.

We have prepared the accompanying Unaudited Condensed Consolidated Financial Statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") applicable to interim financial statements. Accordingly, certain information related to our significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted. These Unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all material adjustments (which include only normally recurring adjustments) necessary to fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented.

Results for interim periods are not necessarily indicative of the results that can be expected for any subsequent interim period or for a full year. These interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 25, 2022 ("2021 Form 10-K").

In the current year, we changed the presentation of our Unaudited Condensed Consolidated Financial Statements from thousands to millions and, as a result, any necessary rounding adjustments have been made to prior year disclosed amounts.

Allowance for Credit Losses

Receivables, net are reported net of an allowance for credit losses. Management evaluates the aging of customer receivable balances, the financial condition of our customers, historical trends, and macroeconomic factors to estimate the amount of customer receivables that may not be collected in the future and records a provision it believes is appropriate. Our reserve for expected credit losses was $58 million and $53 million as of March 31, 2022 and December 31, 2021, respectively. The provision for credit losses was $8 million and $2 million for the three months ended March 31, 2022 and 2021, respectively.

Inventories

Inventories consist of the following (in millions):

			March 31, 2022						December 31, 2021
Aftermarket and refurbished products			$	2,117					$	2,168
Salvage and remanufactured products			421						406
Manufactured products			35						37
Total inventories			$	2,573					$	2,611

Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of March 31, 2022, manufactured products inventory was composed of $25 million of raw materials, $5 million of work in process, and $5 million of finished goods. As of December 31, 2021, manufactured products inventory was composed of $27 million of raw materials, $4 million of work in process, and $5 million of finished goods.

Net Assets Held for Sale

In March 2022, we entered into a definitive agreement to sell PGW Auto Glass (“PGW”), our aftermarket glass business within our Wholesale - North America segment. In connection with entering into this agreement, we concluded that this disposal group met the held for sale criteria and classified PGW's assets and liabilities as held for sale. The sale was completed in April 2022 for a sales price of $362 million, subject to customary post-closing purchase price adjustments.

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As of March 31, 2022, total assets and liabilities of the combined disposal group held for sale on the Unaudited Condensed Consolidated Balance Sheet were as follows (in millions):

			March 31, 2022
Cash and cash equivalents			$	9
Receivables, net			47
Inventories			100
Prepaid expenses and other current assets			1
Total current assets held for sale			157
Property, plant and equipment, net			31
Operating lease assets, net			39
Goodwill			56
Other intangibles, net			6
Other noncurrent assets			1
Total assets held for sale			$	290
Accounts payable			$	83
Accrued payroll-related liabilities			2
Other accrued expenses			3
Current portion of operating lease liabilities			11
Total current liabilities held for sale			99
Long term operating lease liabilities, excluding current portion			27
Other noncurrent liabilities			1
Total liabilities held for sale			$	127

Intangible Assets

Goodwill and indefinite-lived intangible assets are tested for impairment at least annually. We performed our annual impairment test during the fourth quarter of 2021, and determined no impairment existed as all of our reporting units had a fair value estimate which exceeded the carrying value by at least 70%. The fair value estimates of our reporting units were established using weightings of the results of a discounted cash flow methodology and a comparative market multiples approach. Goodwill impairment testing may also be performed on an interim basis when events or circumstances arise that may lead to impairment. We did not identify any indicators of impairment in the first quarter of 2022 that necessitated an interim test of goodwill impairment or indefinite-lived intangible assets impairment.

Investments in Unconsolidated Subsidiaries

We account for our Investments in unconsolidated subsidiaries using the equity method of accounting, as our investments give us the ability to exercise significant influence, but not control, over the investee.

The carrying value of our Investments in unconsolidated subsidiaries were as follows (in millions):

			Ownership as of March 31, 2022						March 31, 2022						December 31, 2021
Mekonomen AB(1)(2)			26.6%						$	145					$	145
Other									34						36
Total									$	179					$	181

(1)    As of March 31, 2022, the fair value of our investment in Mekonomen AB ("Mekonomen") was $183 million based on the quoted market price for Mekonomen's common stock.

(2)    As of March 31, 2022, our share of the book value of Mekonomen's net assets exceeded the book value of our investment by $8 million; this difference is primarily related to Mekonomen's Accumulated Other Comprehensive Income balance as of our acquisition date in 2016. We record our equity in the net earnings of Mekonomen on a one quarter lag.

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Warranty Reserve

Some of our salvage mechanical products are sold with a standard six month warranty against defects. Additionally, some of the remanufactured engines are sold with a standard three or four year warranty against defects. We also provide a limited lifetime warranty for certain of our aftermarket products. These assurance-type warranties are not considered a separate performance obligation, and thus no transaction price is allocated to them. We record warranty costs in Cost of goods sold in our Unaudited Condensed Consolidated Statements of Income. Our warranty reserve is calculated using historical claim information to project future warranty claims activity and is recorded within Other accrued expenses and Other noncurrent liabilities on our Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments. The changes in the warranty reserve are as follows (in millions):

			Warranty Reserve
Balance as of December 31, 2021			$	30
Warranty expense			18
Warranty claims			(16)
Balance as of March 31, 2022			$	32

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

As of March 31, 2022, our Board of Directors had authorized a stock repurchase program under which we are able to purchase up to $2,000 million of our common stock from time to time through October 25, 2024. Repurchases under the program may be made in the open market or in privately negotiated transactions, with the amount and timing of repurchases depending on market conditions and corporate needs. The repurchase program does not obligate us to acquire any specific number of shares and may be suspended or discontinued at any time. Repurchased shares are accounted for as treasury stock using the cost method.

During the three months ended March 31, 2022, we repurchased 2.7 million shares of common stock for an aggregate price of $144 million. During the three months ended March 31, 2021, we repurchased 1.5 million shares of common stock for an aggregate price of $57 million. As of March 31, 2022, there was $510 million of remaining capacity under our repurchase program.

Noncontrolling Interest

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Sources of Revenue

We report our revenue in two categories: (i) parts and services and (ii) other. The following table sets forth our revenue by category, disaggregated by reportable segment (in millions):

			Three Months Ended March 31,
			2022						2021
Wholesale - North America			$	1,106					$	969
Europe			1,481						1,455
Specialty			460						458
Self Service			57						50
Parts and services			3,104						2,932
Wholesale - North America			95						82
Europe			7						8
Self Service			142						149
Other			244						239
Total revenue			$	3,348					$	3,171

Parts and Services

Parts revenue is generated from the sale of vehicle products including replacement parts, components and systems used in the repair and maintenance of vehicles and specialty products and accessories to improve the performance, functionality and appearance of vehicles. Services revenue includes (i) additional services that are generally billed concurrently with the related product sales, such as the sale of service-type warranties, (ii) fees for admission to our self service yards, and (iii) diagnostic and repair services.

For Wholesale - North America and Self Service, vehicle replacement products include sheet metal collision parts such as doors, hoods, and fenders; bumper covers; head and tail lamps; automotive glass products such as windshields; mirrors; grilles; wheels; and large mechanical items such as engines and transmissions. For Europe, vehicle replacement products include a wide variety of small mechanical products such as brake pads, discs and sensors; clutches; electrical products such as spark plugs and batteries; steering and suspension products; filters; and oil and automotive fluids. For our Specialty operations, we serve seven product segments: truck and off-road; speed and performance; recreational vehicles; towing; wheels, tires and performance handling; marine; and miscellaneous accessories.

Our service-type warranties typically have service periods ranging from 6 months to 36 months. Proceeds from these service-type warranties are deferred at contract inception and amortized on a straight-line basis to revenue over the contract period. The changes in deferred service-type warranty revenue are as follows (in millions):

			Service-Type Warranties
Balance as of January 1, 2022			$	32
Additional warranty revenue deferred			11
Warranty revenue recognized			(13)
Balance as of March 31, 2022			$	30

Other Revenue

Revenue from other sources include sales of scrap and precious metals (platinum, palladium, and rhodium), bulk sales to mechanical manufacturers (including cores) and sales of aluminum ingots and sows from furnace operations. We derive scrap metal and other precious metals from several sources in both our Wholesale - North America and Self Service segments, including vehicles that have been used in our recycling operations and vehicles from original equipment manufacturers ("OEMs") and other entities that contract with us for secure disposal of "crush only" vehicles. Revenue from the sale of hulks in our Wholesale - North America and Self Service segments is recognized based on a price per ton of delivered material when the customer (processor) collects the scrap.

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Revenue by Geographic Area

See Note 13, "Segment and Geographic Information" for information related to our revenue by geographic region.

Variable Consideration

The amount of revenue ultimately received from the customer can vary due to variable consideration including returns, discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items. We utilize the “expected value method” or the “most likely amount” method in order to estimate variable consideration, depending on the type of variable consideration, with contemplation of any expected reversals in revenue. We recorded a refund liability and return asset for expected returns of $106 million and $57 million, respectively, as of March 31, 2022, and $107 million and $58 million, respectively, as of December 31, 2021. The refund liability is presented separately on the Unaudited Condensed Consolidated Balance Sheets within current liabilities while the return asset is presented within Prepaid expenses and other current assets. Other types of variable consideration consist primarily of discounts, volume rebates, and other customer sales incentives that are recorded in Receivables, net on the Unaudited Condensed Consolidated Balance Sheets. We recorded a reserve for our variable consideration of $93 million and $144 million as of March 31, 2022 and December 31, 2021, respectively.

Global Restructuring Programs

In 2019, we commenced a cost reduction initiative, covering all of our reportable segments, designed to eliminate underperforming assets and cost inefficiencies. This program was expanded in 2020 as we identified additional opportunities to eliminate inefficiencies, including actions in response to impacts to the business from COVID-19. We have incurred and expect to incur costs for inventory write-downs; employee severance and other expenditures related to employee terminations; lease exit costs, such as lease termination fees, accelerated amortization of operating lease assets and impairment of operating lease assets; other costs related to facility exits, such as moving expenses to relocate inventory and equipment; and accelerated depreciation of fixed assets to be disposed of earlier than the end of the previously estimated useful lives.

During the three months ended March 31, 2022, we did not incur a significant amount of restructuring expenses under these programs. During the three months ended March 31, 2021, we recognized net restructuring expenses totaling $3 million which included employee-related costs, facility exit costs, and a $3 million gain from the sale of a building to be closed. Of the cumulative program costs incurred to date, $58 million, $43 million, $2 million and $2 million related to our Europe, Wholesale – North America, Specialty and Self Service segments, respectively. The actions under the 2019 Global Restructuring Program are substantially complete and the 2020 Global Restructuring Program are expected to be completed in 2023. We estimate total costs under the programs through their expected completion dates will be between $105 million and $115 million, of which approximately $63 million, $44 million, $2 million and $2 million will be incurred by our Europe, Wholesale – North America, Specialty and Self Service segments, respectively; these segment amounts represent the midpoints of the expected ranges of costs to be incurred by each segment.

As of March 31, 2022 and December 31, 2021, restructuring liabilities incurred related to these programs totaled $12 million and $14 million, respectively, including $8 million and $9 million, respectively, related to leases we have exited or expect to exit prior to the end of the lease term (reported in Current portion of operating lease liabilities and Long-term operating lease liabilities, excluding current portion on our Unaudited Condensed Consolidated Balance Sheets). Our lease-related restructuring liabilities are estimated based on remaining rent payments after our actual exit date for facilities closed as of March 31, 2022 and after our planned exit date for facilities we expect to close in future periods; these liabilities do not reflect any estimated proceeds we may be able to achieve through subleasing the facilities.

Acquisition Integration Plans

We did not incur a significant amount of restructuring expenses for our acquisition integration plans for either of the three-month periods ended March 31, 2022 or March 31, 2021. We expect to incur future expenses of up to $5 million to complete an integration plan related to acquisitions completed in our Specialty segment during 2021.

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1 LKQ Europe Program

In 2019, we announced a multi-year program called "1 LKQ Europe" which is intended to create structural centralization and standardization of key functions to facilitate the operation of the Europe segment as a single business. Under the 1 LKQ Europe program, we are reorganizing our non-customer-facing teams and support systems through various projects including the implementation of a common ERP platform, rationalization of our product portfolio, and creation of a Europe headquarters office and central back office. We completed the organizational design and implementation projects in June 2021, with the remaining projects scheduled to be completed by the end of 2024.

During the three months ended March 31, 2022, we did not incur a significant amount of expenses under our 1 LKQ Europe program. During the three months ended March 31, 2021, we recognized $5 million of employee-related restructuring charges. We estimate that we will incur between $40 million and $50 million in total personnel and inventory-related restructuring charges through 2024 under the program. We may identify additional initiatives and projects under the 1 LKQ Europe program in future periods that may result in additional restructuring expense, although we are currently unable to estimate the range of charges for such potential future initiatives and projects. As of March 31, 2022, the restructuring liabilities related to this program were insignificant.

Transaction Related Expenses

During the three months ended March 31, 2022, we incurred $3 million of transaction related expenses. These expenses included external costs such as legal, accounting and advisory fees related to completed and potential transactions.

In order to attract and retain employees, non-employee directors, consultants, and other persons associated with the Company, we grant equity-based awards under the LKQ Corporation 1998 Equity Incentive Plan (the “Equity Incentive Plan”). We have granted restricted stock units ("RSUs"), stock options, and restricted stock under the Equity Incentive Plan. 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, we 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.

Outstanding unvested RSUs earn dividend equivalents at the same rate as dividends on LKQ's common stock. The dividend equivalents are subject to the same vesting requirements, restrictions and forfeiture provisions as the original award.

The fair value of RSUs that vested during the three months ended March 31, 2022 was $18 million; the fair value of RSUs vested is based on the market price of LKQ stock on the date vested.

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The following table summarizes activity related to our RSUs under the Equity Incentive Plan for the three months ended March 31, 2022 (in millions, except years and per share amounts):

			Number Outstanding						Weighted Average Grant Date Fair Value						Weighted Average Remaining Contractual Term (in years)						Aggregate Intrinsic Value(1)
Unvested as of January 1, 2022			1.4						$	34.85
Granted (2)			0.6						$	48.97
Vested			(0.4)						$	34.23
Unvested as of March 31, 2022			1.6						$	40.24
Expected to vest after March 31, 2022			1.4						$	40.33					3.2						$	62

(1)    The aggregate intrinsic value of expected to vest RSUs represents the total pretax intrinsic value (the fair value of LKQ's stock on the last day of the period multiplied by the number of units) that would have been received by the holders had all the expected to vest RSUs vested. This amount changes based on the market price of LKQ’s common stock.

(2)    The weighted average grant date fair value of RSUs granted during the three months ended March 31, 2021 was $38.52.

Starting in 2019, we granted performance-based three-year RSUs ("PSUs") to certain employees, including 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 our 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 applicable three-year performance periods.

Outstanding unvested PSUs earn dividend equivalents at the same rate as dividends on LKQ's common stock. The dividend equivalents are subject to the same vesting requirements, restrictions and forfeiture provisions as the original award.

The fair value of PSUs that vested during the three months ended March 31, 2022 was $8 million; the fair value of PSUs vested is based on the market price of LKQ stock on the date vested.

The following table summarizes activity related to our PSUs under the Equity Incentive Plan for the three months ended March 31, 2022 (in millions, except years and per share amounts):

			Number Outstanding						Weighted Average Grant Date Fair Value						Weighted Average Remaining Contractual Term (in years)						Aggregate Intrinsic Value(1)
Unvested as of January 1, 2022			0.5						$	31.96
Granted (2)			0.1						$	48.92
Vested			(0.2)						$	27.75
Unvested as of March 31, 2022			0.4						$	38.32
Expected to vest after March 31, 2022			0.4						$	38.32					1.7						$	18

(1)     The aggregate intrinsic value of expected to vest PSUs represents the total pretax intrinsic value (the fair value of LKQ's stock on the last day of each period multiplied by the number of units) that would have been received by the holders had all the expected to vest PSUs vested. This amount changes based on the market price of LKQ’s common stock and the achievement of the performance metrics relative to the established targets.

(2)    Represents the number of PSUs at target payout. The weighted average grant date fair value of PSUs granted during the three months ended March 31, 2021 was $38.50.

Stock-Based Compensation Expense

Pre-tax stock-based compensation expense for RSUs and PSUs totaled $13 million and $8 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, unrecognized compensation expense related to unvested RSUs and PSUs was $66 million. Stock-based compensation expense related to these awards will be different to the extent that forfeitures are realized and performance under the PSUs differs from current achievement estimates.

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The following chart sets forth the computation of earnings per share (in millions, except per share amounts):

			Three Months Ended March 31,
			2022						2021
Income from continuing operations			$	269					$	266
Denominator for basic earnings per share—Weighted-average shares outstanding			285.7						303.1
Effect of dilutive securities:
RSUs			0.8						0.6
PSUs			0.3						0.1
Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding			286.8						303.8
Basic earnings per share from continuing operations			$	0.94					$	0.88
Diluted earnings per share from continuing operations (1)			$	0.94					$	0.88

(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 three months ended March 31, 2022 and 2021 (in millions):

			Three Months Ended March 31,
			2022						2021
Antidilutive securities:
RSUs			—						0.1

The components of Accumulated Other Comprehensive Income (Loss) are as follows (in millions):

						Three Months Ended March 31, 2022
						Foreign Currency Translation												Unrealized Gain (Loss) on Pension Plans						Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries						Accumulated Other Comprehensive Income (Loss)
Balance as of January 1, 2022						$	(121)											$	(24)					$	(8)					$	(153)
Pretax loss						(54)												—						—						(54)
Other comprehensive income from unconsolidated subsidiaries						—												—						1						1
Balance as of March 31, 2022						$	(175)											$	(24)					$	(7)					$	(206)

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						Three Months Ended March 31, 2021
						Foreign Currency Translation						Unrealized Gain (Loss) on Cash Flow Hedges						Unrealized Gain (Loss) on Pension Plans						Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries						Accumulated Other Comprehensive Income (Loss)
Balance as of January 1, 2021						$	(57)					$	(1)					$	(33)					$	(8)					$	(99)
Pretax (loss) income						(25)						3						—						—						(22)
Income tax effect						—						(1)						—						—						(1)
Reclassification of unrealized gain						—						(2)						—						—						(2)
Reclassification of deferred income taxes						—						1						—						—						1
Other comprehensive loss from unconsolidated subsidiaries						—						—						—						(3)						(3)
Balance as of March 31, 2021						$	(82)					$	—					$	(33)					$	(11)					$	(126)

During the three months ended March 31, 2021, net unrealized gains on cross currency swaps totaling $2 million were recorded to Other income, net in the Unaudited Condensed Consolidated Statements of Income; these amounts offset the impact of the remeasurement of the underlying transactions.

Net unrealized losses and gains related to our pension plans were recorded to Other income, net in the Unaudited Condensed Consolidated Statements of Income during each of the three-month periods ended March 31, 2022 and 2021.

Our policy is to reclassify the income tax effect from Accumulated other comprehensive income (loss) to the Provision for income taxes when the related gains and losses are released to the Unaudited Condensed Consolidated Statements of Income.

Long-term obligations consist of the following (in millions):

			March 31, 2022						December 31, 2021
Senior secured credit agreement:
Revolving credit facilities			$	1,813					$	1,887
Euro Notes (2024)			553						569
Euro Notes (2028)			277						284
Notes payable through October 2030 at weighted average interest rates of 2.9% and 2.8%, respectively			21						23
Finance lease obligations at weighted average interest rates of 3.5% and 3.5%, respectively			50						52
Other debt at weighted average interest rates of 1.5% and 1.1%, respectively			7						9
Total debt			2,721						2,824
Less: long-term debt issuance costs			(10)						(12)
Total debt, net of debt issuance costs			2,711						2,812
Less: current maturities, net of debt issuance costs			(31)						(35)
Long term debt, net of debt issuance costs			$	2,680					$	2,777

Senior Secured Credit Agreement

On November 23, 2021, LKQ Corporation and certain other subsidiaries of LKQ (collectively, the "Borrowers") entered into Amendment No. 6 to the Fourth Amended and Restated Credit Agreement dated January 29, 2016 (the "Credit Agreement"), which modified certain interest rates to provide that (1) Loans denominated in euros shall bear interest at a rate per annum equal to the Euro Interbank Offered Rate as administered by the European Money Markets Institute (or a comparable or successor administrator approved by the Administrative Agent) plus the Applicable Rate, (2) Swingline Loans denominated in pound sterling shall bear interest at a rate per annum equal to the Sterling Overnight Index Average as administered by the Bank of England (or any successor administrator of the Sterling Overnight Index Average) (“SONIA”) plus the Applicable Rate, (3)

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Revolving Loans denominated in pound sterling shall bear interest at a rate per annum equal to SONIA plus an adjustment equal to 0.0326% per annum plus the Applicable Rate, and (4) Loans denominated in Swiss francs shall bear interest at a rate per annum equal to the Swiss Average Rate Overnight as administered by SIX Swiss Exchange AG (or any successor administrator of the Swiss Average Rate Overnight) plus the Applicable Rate. All other interest rates remain the same.

On April 18, 2022, S&P Global Ratings assigned LKQ an issuer credit rating of 'BBB-' with a stable outlook. This rating upgrade triggered the banks in our credit facility to release all collateral required under the Credit Agreement and suspend all collateral requirements.

The total capacity under the revolving credit facility's multicurrency component is $3,150 million. Amounts outstanding under the revolving credit facility are due and payable upon maturity of the Credit Agreement on January 29, 2024.

We also had the option to prepay outstanding amounts under the Credit Agreement without penalty. We were required to prepay the term loan by amounts equal to proceeds from the sale or disposition of certain assets if the proceeds were not reinvested within twelve months. During the second quarter of 2021, we exercised our option to prepay the outstanding amount on the term loan, and thus did not have any term loan borrowings as of March 31, 2022.

The Credit Agreement contains customary representations and warranties and customary covenants that provide limitations and conditions on our ability to enter into certain transactions. The Credit Agreement also contains financial and affirmative covenants, including limitations on our net leverage ratio and a minimum interest coverage ratio.

Borrowings under the Credit Agreement bear interest at variable rates, which depend on the currency and duration of the borrowing elected, plus an applicable margin. The applicable margin is subject to change in increments of 0.25% depending on the net leverage ratio. Interest payments are due on the last day of the selected interest period or quarterly in arrears depending on the type of borrowing. The weighted average interest rates on borrowings outstanding under the Credit Agreement at March 31, 2022 and December 31, 2021 were 1.2% and 1.1%, 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 no current maturities as of March 31, 2022 or December 31, 2021. As of March 31, 2022, there were letters of credit outstanding in the aggregate amount of $69 million. The amounts available under the revolving credit facilities are reduced by the amounts outstanding under letters of credit, and thus availability under the revolving credit facilities at March 31, 2022 was $1,268 million.

Euro Notes (2024)

On April 14, 2016, LKQ Italia Bondco S.p.A. ("LKQ Italia"), an indirect, wholly-owned subsidiary of LKQ Corporation, completed an offering of €500 million aggregate principal amount of senior notes due April 1, 2024 (the "Euro Notes (2024)") in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering were used to repay a portion of the revolver borrowings under the Credit Agreement and to pay related fees and expenses. The Euro Notes (2024) are governed by the Indenture dated as of April 14, 2016 (the "Euro Notes (2024) Indenture") among LKQ Italia, LKQ Corporation and certain of our subsidiaries (the "Euro Notes (2024) Subsidiaries"), the trustee, and the paying agent, transfer agent, and registrar.

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.

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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 (2026/2028)

On April 9, 2018, LKQ European Holdings B.V. ("LKQ Euro Holdings"), a wholly-owned subsidiary of LKQ Corporation, completed an offering of €1,000 million aggregate principal amount of senior notes. The offering consisted of €750 million senior notes due 2026 (the "Euro Notes (2026)") and €250 million senior notes due 2028 (the "Euro Notes (2028)" and, together with the Euro Notes (2026), the "Euro Notes (2026/28)") in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering, together with borrowings under our senior secured credit facility, were used (i) to finance a portion of the consideration paid for the Stahlgruber acquisition, (ii) for general corporate purposes and (iii) to pay related fees and expenses, including the refinancing of net financial debt. The Euro Notes (2026/28) are governed by the Indenture dated as of April 9, 2018 (the “Euro Notes (2026/28) Indenture”) among LKQ Euro Holdings, LKQ Corporation and certain of our subsidiaries (the “Euro Notes (2026/28) Subsidiaries”), the trustee, paying agent, transfer agent, and registrar.

On April 1, 2021, we redeemed the 3.625% Euro Notes (2026) at a redemption price equal to 101.813% of the principal amount of the Euro Notes (2026) plus accrued and unpaid interest thereon to, but not including, April 1, 2021. The total redemption payment was $915 million (€777 million), including an early redemption premium of $16 million (€14 million) and accrued and unpaid interest of $16 million (€14 million). In the second quarter of 2021, we recorded a loss on debt extinguishment of $24 million related to the redemption due to the early-redemption premium and the write-off of the unamortized debt issuance costs.

The Euro Notes (2028) bear interest at a rate of 4.125% 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 (2028) is payable in arrears on April 1 and October 1 of each year. The Euro Notes (2028) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2028) Subsidiaries (the "Euro Notes (2028) Guarantors").

The Euro Notes (2028) and the related guarantees are, respectively, LKQ Euro Holdings' and each Euro Notes (2028) Guarantor's senior unsecured obligations and will be subordinated to all of LKQ Euro Holdings' and the Euro Notes (2028) Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2028) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2028) to the extent of the assets of those subsidiaries. The Euro Notes (2028) have been listed on the Global Exchange Market of Euronext Dublin.

The Euro Notes (2028) are redeemable, in whole or in part, at any time at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus a "make whole" premium. On or after April 1, 2023, we may redeem some or all of the Euro Notes (2028) at the applicable redemption prices set forth in the Euro Notes (2026/28) Indenture. We may be required to make an offer to purchase the Euro Notes (2028) upon the sale of certain assets, subject to certain exceptions, and upon a change of control. In addition, in the event of certain developments affecting taxation or under certain other circumstances which, in any case, require the payment of certain additional amounts, we may redeem the Euro Notes (2028) in whole, but not in part, at any time at a redemption price of 100% of the principal amount thereof, plus accrued but unpaid interest, if any, and such certain additional amounts, if any, to the redemption date.

Restricted Payments

Our senior secured credit agreement and our senior notes indentures contain limitations on payment of cash dividends or other distributions of assets. Delaware law also imposes restrictions on dividend payments. These restrictions did not impact the payment of our dividend declared in February 2022 and paid in March 2022 and are not expected to impact future dividend payments.

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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 may 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.

Cash Flow Hedges

Through June 30, 2021, we held interest rate swap agreements to hedge a portion of the variable interest rate risk on our variable rate borrowings under our Credit Agreement, 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 paid the fixed interest rate and received 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 were recorded in Accumulated other comprehensive income (loss) and were reclassified to Interest expense, net of interest income when the underlying interest payment impacted earnings.

We held cross currency swaps in the beginning of 2021, which contained 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 were 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 were recorded in Accumulated other comprehensive income (loss) and were reclassified to Interest expense, net of interest income and Other income, net when the underlying transactions had an impact on earnings. We had no outstanding cross currency swaps as of March 31, 2022.

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 where we apply hedge accounting are recorded in Accumulated other comprehensive income (loss) and reclassified to Other (income) expense, net when the underlying transaction has an impact on earnings.

As of March 31, 2022 and December 31, 2021, we held no cash flow hedges. The activity related to our previously matured cash flow hedges is included in Note 7, "Accumulated Other Comprehensive Income (Loss)."

The activity related to our cash flow hedges is presented in either operating activities or financing activities in our Unaudited Condensed Consolidated Statements of Cash Flows.

Other Derivative Instruments Not Designated as Hedges

To manage our foreign currency exposure on non-functional currency denominated borrowings, we entered into short-term foreign currency forward contracts in 2021. As of March 31, 2022, we held no foreign currency forward contracts related to non-functional currency denominated borrowings.

We elected not to apply hedge accounting for these transactions, and therefore the contracts were adjusted to fair value through our results of operations as of each balance sheet date. The fair values of these short-term derivative instruments were recorded in either Prepaid expenses and other current assets or Other accrued expenses on our Unaudited Condensed Consolidated Balance Sheets.

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Financial Assets and Liabilities Measured at Fair Value

We use the market and income approaches to estimate the fair value of our financial assets and liabilities, and during the three months ended March 31, 2022, there were no significant changes in valuation techniques or inputs related to the financial assets or liabilities that we have historically recorded at fair value. The tiers in the fair value hierarchy include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following tables present information about our financial liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation inputs we utilized to determine such fair value as of March 31, 2022 and December 31, 2021 (in millions):

			Balance as of March 31, 2022						Fair Value Measurements as of March 31, 2022
									Level 1						Level 2						Level 3
Liabilities:
Contingent consideration liabilities			$	14					$	—					$	—					$	14
Deferred compensation liabilities			86						—						86						—
Total Liabilities			$	100					$	—					$	86					$	14

			Balance as of December 31, 2021						Fair Value Measurements as of December 31, 2021
									Level 1						Level 2						Level 3
Liabilities:
Contingent consideration liabilities			$	18					$	—					$	—					$	18
Deferred compensation liabilities			89						—						89						—
Total Liabilities			$	107					$	—					$	89					$	18

The current portion of contingent consideration liabilities is included in Other current liabilities on the Unaudited Condensed Consolidated Balance Sheets; the noncurrent portion of deferred compensation liabilities and contingent consideration liabilities is included in Other noncurrent liabilities on the Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments.

Our Level 2 liabilities are valued using inputs from third parties and market observable data. We obtain valuation data for the deferred compensation liabilities from third party sources, which use quoted market prices, investment allocations and reportable trades.

Our contingent consideration liabilities are related to our business acquisitions. Under the terms of the contingent consideration agreements, payments may be made at specified future dates depending on the performance of the acquired business subsequent to the acquisition. The liabilities for these payments are classified as Level 3 liabilities because the related fair value measurement, which is determined using an income approach, includes significant inputs not observable in the market.

We also have equity investments recorded in Other noncurrent assets that are reported at fair value. We have used net asset value as a practical expedient to value these equity investments and thus they are excluded from the fair value hierarchy disclosure.

Financial Assets and Liabilities Not Measured at Fair Value

Our debt is reflected on the Unaudited Condensed Consolidated Balance Sheets at cost. Based on market conditions as of both March 31, 2022 and December 31, 2021, the fair value of the credit agreement borrowings reasonably approximated the carrying values of $1,813 million and $1,887 million, respectively. As of March 31, 2022 and December 31, 2021, the fair values of the Euro Notes (2024) were approximately $573 million and $605 million, respectively, compared to carrying values of $553 million and $569 million, respectively. As of March 31, 2022 and December 31, 2021, the fair values of the Euro Notes (2028) were $287 million and $301 million, respectively, compared to carrying values of $277 million and $284 million, respectively.

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We have funded and unfunded defined benefit plans covering certain employee groups in the U.S. and various European countries. Local statutory requirements govern many of our European plans. The defined benefit plans are mostly closed to new participants and, in some cases, existing participants no longer accrue benefits.

As of March 31, 2022 and December 31, 2021, the aggregate funded status of the defined benefit plans was a liability of $125 million and $131 million, respectively, and is reported in Other noncurrent liabilities and Accrued payroll-related liabilities on our Unaudited Condensed Consolidated Balance Sheets.

Net periodic benefit cost for our defined benefit plans totaled $1 million for each of the three-month periods ended March 31, 2022 and 2021 and primarily related to service cost which is recorded to Selling, general and administrative expenses on the Unaudited Condensed Consolidated Statements of Income.

At the end of each interim period, we estimate our annual effective tax rate and apply that rate to our interim earnings. We also record the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and the effects of changes in tax laws or rates, in the interim period in which they occur.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in state and foreign jurisdictions, permanent and temporary differences between book and taxable income, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.

Our effective income tax rate for the three months ended March 31, 2022 was 25.0%, compared to 26.3% for the three months ended March 31, 2021. The lower estimated annual effective tax rate for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 is primarily attributable to the geographic distribution of income. For the three months ended March 31, 2022, the effective tax rate was partially decreased by net favorable discrete items including excess tax benefits from stock-based payments partially offset by the revaluation of deferred tax balances in connection with an enacted rate change. Net discrete items for the three months ended March 31, 2021 reduced the effective tax rate by 0.2%, primarily due to excess tax benefits on stock-based payments. Additionally, for the three months ended March 31, 2022, we recorded a $4 million benefit related to the reassessment of a previously recorded valuation allowance on a deferred tax asset. This item was recorded to Net income from discontinued operations.

We have four operating segments: Wholesale – North America, Europe, Specialty and Self Service, each of which is presented as a reportable segment. Beginning in 2022, the Wholesale - North America and Self Service operating segment results were separated from the previous reportable segment, North America, and each of Wholesale - North America and Self Service is now a separate reportable segment. Segment results have been adjusted retrospectively to reflect this change.

The segments are organized based on a combination of geographic areas served and type of product lines offered. The segments are managed separately as the businesses serve different customers and are affected by different economic conditions. Wholesale - North America and Self Service have similar economic characteristics and have common products and services, customers and methods of distribution. We are reporting these operating segments separately to provide greater transparency to investors.

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The following tables present our financial performance by reportable segment for the periods indicated (in millions):

			Wholesale - North America						Europe						Specialty						Self Service						Eliminations						Consolidated
Three Months Ended March 31, 2022
Revenue:
Third Party			$	1,201					$	1,488					$	460					$	199					$	—					$	3,348
Intersegment			—						—						1						—						(1)						—
Total segment revenue			$	1,201					$	1,488					$	461					$	199					$	(1)					$	3,348
Segment EBITDA			$	218					$	131					$	58					$	40					$	—					$	447
Depreciation and amortization (1)			19						34						8						4						—						65
Three Months Ended March 31, 2021
Revenue:
Third Party			$	1,051					$	1,463					$	458					$	199					$	—					$	3,171
Intersegment			—						—						1						—						(1)						—
Total segment revenue			$	1,051					$	1,463					$	459					$	199					$	(1)					$	3,171
Segment EBITDA			$	194					$	141					$	61					$	56					$	—					$	452
Depreciation and amortization (1)			21						40						7						4						—						72

(1)    Amounts presented include depreciation and amortization expense recorded within Cost of goods sold and Restructuring and transaction related expenses.

The key measure of segment profit or loss reviewed by our chief operating decision maker, our Chief Executive Officer, is Segment EBITDA. We use Segment EBITDA to compare profitability among the segments and evaluate business strategies. Segment EBITDA includes revenue and expenses that are controllable by the segment. Corporate general and administrative expenses are allocated to the segments based on usage, with shared expenses apportioned based on the segment's percentage of consolidated revenue. We calculate Segment EBITDA as EBITDA excluding restructuring and transaction related expenses (which includes restructuring expenses recorded in Cost of goods sold); change in fair value of contingent consideration liabilities; other gains and losses related to acquisitions, equity method investments, or divestitures; equity in losses and earnings of unconsolidated subsidiaries; equity investment fair value adjustments; impairment charges; and direct impacts of the Ukraine/Russia conflict and related sanctions (including provisions for reserves for asset recoverability and expenditures to support our employees and their families). EBITDA, which is the basis for Segment EBITDA, is calculated as net income excluding discontinued operations, depreciation, amortization, interest (which includes gains and losses on debt extinguishment) and income tax expense.

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The table below provides a reconciliation of Net Income to EBITDA and Segment EBITDA (in millions):

			Three Months Ended March 31,
			2022						2021
Net income			$	273					$	266
Subtract:
Net income from discontinued operations			4						—
Net income from continuing operations			269						266
Add:
Depreciation and amortization			59						66
Depreciation and amortization - cost of goods sold			6						6
Interest expense, net of interest income			15						24
Provision for income taxes			89						93
EBITDA			438						455
Subtract:
Equity in earnings of unconsolidated subsidiaries (1)			2						6
Equity investment fair value adjustments			(1)						5
Add:
Restructuring and transaction related expenses			3						8
Losses on previously held equity interests			1						—
Direct impacts of Ukraine/Russia conflict (2)			6						—
Segment EBITDA			$	447					$	452

(1)    Refer to "Investments in Unconsolidated Subsidiaries" in Note 2, "Financial Statement Information," for further information.

(2)    Adjustments include provisions for reserves for asset recoverability (receivables and inventory) and expenditures to support our employees and their families in Ukraine.

The following table presents capital expenditures by reportable segment (in millions):

			Three Months Ended March 31,
			2022						2021
Capital Expenditures
Wholesale – North America			$	29					$	11
Europe			23						26
Specialty			4						2
Self Service			3						3
Total capital expenditures			$	59					$	42

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The following table presents assets by reportable segment (in millions):

			March 31, 2022 (1)						December 31, 2021
Receivables, net
Wholesale – North America			$	374					$	367
Europe			702						586
Specialty			142						102
Self Service			21						18
Total receivables, net			1,239						1,073
Inventories
Wholesale – North America			696						776
Europe			1,300						1,327
Specialty			519						458
Self Service			58						50
Total inventories			2,573						2,611
Property, plant and equipment, net
Wholesale – North America			501						526
Europe			561						577
Specialty			92						93
Self Service			102						103
Total property, plant and equipment, net			1,256						1,299
Operating lease assets, net
Wholesale – North America			563						611
Europe			498						515
Specialty			92						83
Self Service			148						152
Total operating lease assets, net			1,301						1,361
Other unallocated assets			6,409						6,262
Total assets			$	12,778					$	12,606

(1)    The Wholesale - North America segment excludes amounts which are held for sale. See Note 2, "Financial Statement Information" for information related to the held for sale balances.

We report net receivables; inventories; net property, plant and equipment; and net operating lease assets by segment as that information is used by the chief operating decision maker in assessing segment performance. These assets provide a measure for the operating capital employed in each segment. Unallocated assets include cash and cash equivalents, prepaid expenses and other current and noncurrent assets, goodwill, other intangibles and equity method investments.

Our largest countries of operation are the U.S., followed by the U.K. and Germany. Additional European operations are located in the Netherlands, Italy, Czech Republic, Belgium, Austria, Slovakia, Poland, and other European countries. Our operations in other countries include wholesale operations in Canada, remanufacturing operations in Mexico, an aftermarket parts freight consolidation warehouse in Taiwan, and administrative support functions in India. Our net sales are attributed to geographic area based on the location of the selling operation.

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The following table sets forth our revenue by geographic area (in millions):

			Three Months Ended March 31,
			2022						2021
Revenue
United States			$	1,750					$	1,605
United Kingdom			425						403
Germany			386						388
Other countries			787						775
Total revenue			$	3,348					$	3,171

The following table sets forth our tangible long-lived assets by geographic area (in millions):

			March 31, 2022						December 31, 2021
Long-lived assets
United States			$	1,419					$	1,487
Germany			314						329
United Kingdom			290						305
Other countries			534						539
Total long-lived assets			$	2,557					$	2,660

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