LKQ CORP 10-Q

Item 1. Financial Statements LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Income (In thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenue $ 2,626,323 $ 3,248,173 $ 5,627,258 $ 6,348,476 Cost of goods sold 1,615,319 2,000,986 3,402,378 3,893,025 Gross margin 1,011,004 1,247,187 2,224,880 2,455,451 Selling, general and administrative expenses 737,369 898,368 1,637,180 1,794,900 Restructuring and acquisition related expenses 24,950 8,377 31,920 11,684 Loss on disposal of businesses and impairment of net assets held for sale 2,485 33,497 2,236 48,520 Depreciation and amortization 65,747 70,834 131,242 141,836 Operating income 180,453 236,111 422,302 458,511 Other expense (income): Interest expense, net of interest income 25,616 35,884 51,547 71,973 Loss on debt extinguishment — — 12,751 — Other income, net ( 8,174 ) ( 5,733 ) ( 11,796 ) ( 9,584 ) Total other expense, net 17,442 30,151 52,502 62,389 Income from continuing operations before provision for income taxes 163,011 205,960 369,800 396,122 Provision for income taxes 41,869 55,825 102,280 107,375 Equity in (losses) earnings of unconsolidated subsidiaries ( 2,649 ) 1,572 ( 2,133 ) ( 37,977 ) Income from continuing operations 118,493 151,707 265,387 250,770 Net income (loss) from discontinued operations 277 398 ( 638 ) 398 Net income 118,770 152,105 264,749 251,168 Less: net (loss) income attributable to continuing noncontrolling interest ( 22 ) 1,352 718 2,367 Less: net income attributable to discontinued noncontrolling interest — 192 103 192 Net income attributable to LKQ stockholders $ 118,792 $ 150,561 $ 263,928 $ 248,609 Basic earnings per share: (1) Income from continuing operations $ 0.39 $ 0.49 $ 0.87 $ 0.80 Net income (loss) from discontinued operations 0.00 0.00 ( 0.00 ) 0.00 Net income 0.39 0.49 0.87 0.80 Less: net (loss) income attributable to continuing noncontrolling interest ( 0.00 ) 0.00 0.00 0.01 Less: net income attributable to discontinued noncontrolling interest — 0.00 0.00 0.00 Net income attributable to LKQ stockholders $ 0.39 $ 0.48 $ 0.86 $ 0.79 Diluted earnings per share: (1) Income from continuing operations $ 0.39 $ 0.49 $ 0.87 $ 0.80 Net income (loss) from discontinued operations 0.00 0.00 ( 0.00 ) 0.00 Net income 0.39 0.49 0.87 0.80 Less: net (loss) income attributable to continuing noncontrolling interest ( 0.00 ) 0.00 0.00 0.01 Less: net income attributable to discontinued noncontrolling interest — 0.00 0.00 0.00 Net income attributable to LKQ stockholders $ 0.39 $ 0.48 $ 0.86 $ 0.79 (1) The sum of the individual earnings per share amounts may not equal the total due to rounding. The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 2 LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Comprehensive Income (In thousands) Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net income $ 118,770 $ 152,105 $ 264,749 $ 251,168 Less: net (loss) income attributable to continuing noncontrolling interest ( 22 ) 1,352 718 2,367 Less: net income attributable to discontinued noncontrolling interest — 192 103 192 Net income attributable to LKQ stockholders 118,792 150,561 263,928 248,609 Other comprehensive income (loss): Foreign currency translation, net of tax 31,334 5,602 ( 72,631 ) ( 4,293 ) Net change in unrealized gains/losses on cash flow hedges, net of tax ( 31 ) ( 5,650 ) ( 7,352 ) ( 8,387 ) Net change in unrealized gains/losses on pension plans, net of tax 1,875 28 1,995 219 Other comprehensive income (loss) from unconsolidated subsidiaries 962 2,321 ( 890 ) ( 1,142 ) Other comprehensive income (loss) 34,140 2,301 ( 78,878 ) ( 13,603 ) Comprehensive income 152,910 154,406 185,871 237,565 Less: comprehensive (loss) income attributable to continuing noncontrolling interest ( 22 ) 1,352 718 2,367 Less: comprehensive income attributable to discontinued noncontrolling interest — 192 103 192 Comprehensive income attributable to LKQ stockholders $ 152,932 $ 152,862 $ 185,050 $ 235,006 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 3 LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Balance Sheets (In thousands, except share and per share data) June 30, December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 476,426 $ 523,020 Receivables, net 1,125,816 1,131,132 Inventories 2,288,293 2,772,777 Prepaid expenses and other current assets 216,438 260,890 Total current assets 4,106,973 4,687,819 Property, plant and equipment, net 1,196,505 1,234,400 Operating lease assets, net 1,272,513 1,308,511 Intangible assets: Goodwill 4,377,350 4,406,535 Other intangibles, net 798,799 850,338 Equity method investments 136,673 139,243 Other noncurrent assets 146,486 153,110 Total assets $ 12,035,299 $ 12,779,956 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 756,846 $ 942,795 Accrued expenses: Accrued payroll-related liabilities 179,470 179,203 Refund liability 103,679 97,314 Value added taxes payable 160,294 46,490 Other accrued expenses 258,490 243,193 Income taxes payable 114,202 26,959 Other current liabilities 67,410 94,664 Current portion of operating lease liabilities 216,177 221,527 Current portion of long-term obligations 93,200 326,367 Total current liabilities 1,949,768 2,178,512 Long-term operating lease liabilities, excluding current portion 1,112,230 1,137,597 Long-term obligations, excluding current portion 3,157,725 3,715,389 Deferred income taxes 299,867 310,129 Other noncurrent liabilities 343,691 365,672 Commitments and contingencies Redeemable noncontrolling interest 24,077 24,077 Stockholders' equity: Common stock, $0.01 par value, 1,000,000,000 shares authorized, 320,530,156 shares issued and 304,034,241 shares outstanding at June 30, 2020; 319,927,243 shares issued and 306,731,328 shares outstanding at December 31, 2019 3,205 3,199 Additional paid-in capital 1,433,338 1,418,239 Retained earnings 4,401,545 4,140,136 Accumulated other comprehensive loss ( 279,763 ) ( 200,885 ) Treasury stock, at cost; 16,495,915 shares at June 30, 2020 and 13,195,915 shares at December 31, 2019 ( 439,819 ) ( 351,813 ) Total Company stockholders' equity 5,118,506 5,008,876 Noncontrolling interest 29,435 39,704 Total stockholders' equity 5,147,941 5,048,580 Total liabilities and stockholders' equity $ 12,035,299 $ 12,779,956 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 4 LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Cash Flows (In thousands) Six Months Ended June 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 264,749 $ 251,168 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 144,309 152,361 Impairment of equity method investments — 39,551 Loss on disposal of businesses and impairment of net assets held for sale 2,236 48,520 Stock-based compensation expense 15,763 13,659 Loss on debt extinguishment 12,751 — Other ( 3,554 ) ( 3,516 ) Changes in operating assets and liabilities, net of effects from acquisitions and dispositions: Receivables, net ( 5,111 ) ( 149,052 ) Inventories 445,493 131,229 Prepaid income taxes/income taxes payable 84,125 25,967 Accounts payable ( 172,140 ) 96,888 Other operating assets and liabilities 124,431 31,629 Net cash provided by operating activities 913,052 638,404 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ( 77,301 ) ( 101,268 ) Proceeds from disposals of property, plant and equipment 6,110 1,976 Acquisitions, net of cash acquired ( 5,465 ) ( 14,767 ) Proceeds from disposal of businesses, net of cash sold 4,602 — Other investing activities, net ( 3,917 ) ( 2,711 ) Net cash used in investing activities ( 75,971 ) ( 116,770 ) CASH FLOWS FROM FINANCING ACTIVITIES: Early-redemption premium ( 9,498 ) — Repayment of U.S. Notes (2023) ( 600,000 ) — Borrowings under revolving credit facilities 494,485 312,880 Repayments under revolving credit facilities ( 601,480 ) ( 471,439 ) Repayments under term loans ( 8,750 ) ( 4,375 ) Borrowings under receivables securitization facility 111,300 36,600 Repayments under receivables securitization facility ( 111,300 ) ( 146,600 ) Repayments of other debt, net ( 66,073 ) ( 8,367 ) Purchase of treasury stock ( 88,006 ) ( 190,762 ) Other financing activities, net ( 10,832 ) 75 Net cash used in financing activities ( 890,154 ) ( 471,988 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 5,358 ) ( 102 ) Net (decrease) increase in cash, cash equivalents and restricted cash ( 58,431 ) 49,544 Cash, cash equivalents and restricted cash of continuing operations, beginning of period 528,387 337,250 Add: Cash, cash equivalents and restricted cash of discontinued operations, beginning of period 6,470 — Cash, cash equivalents and restricted cash of continuing and discontinued operations, beginning of period 534,857 337,250 Cash, cash equivalents and restricted cash of continuing and discontinued operations, end of period 476,426 386,794 Less: Cash and cash equivalents of discontinued operations, end of period — 5,372 Cash, cash equivalents and restricted cash, end of period $ 476,426 $ 381,422 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 5 Six Months Ended June 30, 2020 2019 Reconciliation of cash, cash equivalents and restricted cash Cash and cash equivalents $ 476,426 $ 375,967 Restricted cash included in Other noncurrent assets — 5,455 Cash, cash equivalents and restricted cash, end of period $ 476,426 $ 381,422 Supplemental disclosure of cash paid for: Income taxes, net of refunds $ 24,452 $ 88,001 Interest 55,910 75,259 Supplemental disclosure of noncash investing and financing activities: Leased assets obtained in exchange for new finance lease liabilities $ 8,225 $ 7,568 Leased assets obtained in exchange for new operating lease liabilities 36,458 61,891 Noncash property, plant and equipment additions 7,200 14,227 Notes payable and other financing obligations, including notes issued, debt assumed and settlement of pre-existing balances in connection with business acquisitions and disposals 6,136 45,420 Notes receivable and contingent consideration receivable acquired in connection with disposal of businesses 8,549 — Contingent consideration liabilities 3,045 5,377 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 6 LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Stockholders' Equity (In thousands) LKQ Stockholders Common Stock Treasury Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Noncontrolling Interest Total Stockholders' Equity Shares Amount Shares Amount BALANCE, April 1, 2020 320,439 $ 3,204 ( 16,496 ) $ ( 439,819 ) $ 1,425,600 $ 4,282,753 $ ( 313,903 ) $ 29,484 $ 4,987,319 Net income (loss) — — — — — 118,792 — ( 22 ) 118,770 Other comprehensive income — — — — — — 34,140 — 34,140 Vesting of restricted stock units, net of shares withheld for employee tax 91 1 — — ( 57 ) — — — ( 56 ) Stock-based compensation expense — — — — 7,795 — — — 7,795 Capital contributions from, net of dividends declared to, noncontrolling interest shareholder — — — — — — — ( 27 ) ( 27 ) BALANCE, June 30, 2020 320,530 $ 3,205 ( 16,496 ) $ ( 439,819 ) $ 1,433,338 $ 4,401,545 $ ( 279,763 ) $ 29,435 $ 5,147,941 LKQ Stockholders Common Stock Treasury Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Noncontrolling Interest Total Stockholders' Equity Shares Amount Shares Amount BALANCE, April 1, 2019 318,889 $ 3,189 ( 4,915 ) $ ( 130,462 ) $ 1,420,685 $ 3,696,924 $ ( 190,854 ) $ 57,292 $ 4,856,774 Net income — — — — — 150,561 — 1,544 152,105 Other comprehensive income — — — — — — 2,301 — 2,301 Purchase of treasury stock — — ( 4,400 ) ( 120,300 ) — — — — ( 120,300 ) Vesting of restricted stock units, net of shares withheld for employee tax 68 1 — — ( 78 ) — — — ( 77 ) Stock-based compensation expense — — — — 7,986 — — — 7,986 Exercise of stock options 53 0 — — 536 — — — 536 Capital contributions from, net of dividends declared to, noncontrolling interest shareholder — — — — — — — 162 162 Acquired noncontrolling interest — — — — — — — 10,261 10,261 BALANCE, June 30, 2019 319,010 $ 3,190 ( 9,315 ) $ ( 250,762 ) $ 1,429,129 $ 3,847,485 $ ( 188,553 ) $ 69,259 $ 4,909,748 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 7 LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Stockholders' Equity (In thousands) LKQ Stockholders Common Stock Treasury Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Noncontrolling Interest Total Stockholders' Equity Shares Amount Shares Amount BALANCE, January 1, 2020 319,927 $ 3,199 ( 13,196 ) $ ( 351,813 ) $ 1,418,239 $ 4,140,136 $ ( 200,885 ) $ 39,704 $ 5,048,580 Net income — — — — — 263,928 — 821 264,749 Other comprehensive loss — — — — — — ( 78,878 ) — ( 78,878 ) Purchase of treasury stock — — ( 3,300 ) ( 88,006 ) — — — — ( 88,006 ) Vesting of restricted stock units, net of shares withheld for employee tax 491 5 — — ( 2,130 ) — — — ( 2,125 ) Stock-based compensation expense — — — — 15,763 — — — 15,763 Exercise of stock options 112 1 — — 1,466 — — — 1,467 Capital contributions from, net of dividends declared to, noncontrolling interest shareholder — — — — — — — 314 314 Adoption of ASU 2016-13 (see Note 3) — — — — — ( 2,519 ) — — ( 2,519 ) Disposition of subsidiary with noncontrolling interests (1) — — — — — — — ( 11,404 ) ( 11,404 ) BALANCE, June 30, 2020 320,530 $ 3,205 ( 16,496 ) $ ( 439,819 ) $ 1,433,338 $ 4,401,545 $ ( 279,763 ) $ 29,435 $ 5,147,941 (1) The amount disposed of in 2020 relates to discontinued operations. See Note 2, "Discontinued Operations," for further information. LKQ Stockholders Common Stock Treasury Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Noncontrolling Interest Total Stockholders' Equity Shares Amount Shares Amount BALANCE, January 1, 2019 318,418 $ 3,184 ( 2,272 ) $ ( 60,000 ) $ 1,415,188 $ 3,598,876 $ ( 174,950 ) $ 56,454 $ 4,838,752 Net income — — — — — 248,609 — 2,559 251,168 Other comprehensive loss — — — — — — ( 13,603 ) — ( 13,603 ) Purchase of treasury stock — — ( 7,043 ) ( 190,762 ) — — — — ( 190,762 ) Vesting of restricted stock units, net of shares withheld for employee tax 371 4 — — ( 1,158 ) — — — ( 1,154 ) Stock-based compensation expense — — — — 13,659 — — — 13,659 Exercise of stock options 236 2 — — 1,868 — — — 1,870 Tax withholdings related to net share settlements of stock-based compensation awards
 ( 15 ) — — — ( 428 ) — — — ( 428 ) Capital contributions from, net of dividends declared to, noncontrolling interest shareholder — — — — — — — ( 15 ) ( 15 ) Acquired noncontrolling interest — — — — — — — 10,261 10,261 BALANCE, June 30, 2019 319,010 $ 3,190 ( 9,315 ) $ ( 250,762 ) $ 1,429,129 $ 3,847,485 $ ( 188,553 ) $ 69,259 $ 4,909,748 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 8 LKQ CORPORATION AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Interim Financial Statements The accompanying unaudited condensed consolidated 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 have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the 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, 2019 filed with the SEC o n February 27, 2020 ("2019 Form 10-K"). The coronavirus disease 2019 ("COVID-19") pandemic and the resulting governmental actions taken to control the virus have impacted, and are expected to continue to impact, our business in 2020 and into 2021. The effects include, but are not limited to, a reduction in demand for our products and services, liquidity challenges for certain of our customers and suppliers, and organizational changes, such as personnel reductions and route consolidation, driven by cost actions to mitigate the actual and expected revenue decline. We have considered COVID-19 impacts in the preparation of our financial statements and footnotes as of and for the three and six months ended June 30, 2020. Specific disclosures are presented in the following footnotes as applicable. The ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on future developments, including the severity and duration of the pandemic and the related impact on the global economy, which are uncertain and cannot be predicted at this time. Note 2. Discontinued Operations On May 30, 2018, we acquired Stahlgruber GmbH ("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. Prior to closing, 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. We completed the sale of Stahlgruber's Czech Republic business on February 28, 2020, resulting in a loss on sale of $ 1 million (presented in Net income (loss) from discontinued operations in the Unaudited Condensed Consolidated Statements of Income). As part of the transaction, we purchased the 48.2 % noncontrolling interest from the minority shareholder for a purchase price of € 8 million, which included the issuance of € 4 million of notes payable, and then concurrently sold 100 % of the business for a purchase price of € 14 million, which included € 7 million of notes receivable. This transaction resulted in a disposition of noncontrolling interest of $ 11 million. From January 1, 2020 through the date of sale, we recorded an immaterial amount of net income (excluding the loss on sale) from discontinued operations related to the business, of which an immaterial amount was attributable to the noncontrolling interest. During the three months ended June 30, 2020, we recorded an immaterial adjustment related to the loss on disposal of the business. As of December 31, 2019, the assets held for sale, liabilities held for sale, and noncontrolling interest of Stahlgruber's Czech Republic business were recorded within Prepaid expenses and other current assets, Other current liabilities, and Noncontrolling interest, respectively, on the Unaudited Condensed Consolidated Balance Sheets. 9 Note 3. Financial Statement Information 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 lifetime credit losses was approximately $ 70 million and $ 53 million at June 30, 2020 and December 31, 2019, respectively. Bad debt expense totaled $ 24 million and $ 6 million for the six months ended June 30, 2020 and June 30, 2019, respectivel y. The increase in our allowance for credit losses since December 31, 2019 is attributable to the $ 3 million effect of the adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13") in the first quarter of 2020 (see the Recently Adopted Accounting Pronouncements section below for further details) and an increase in expected lifetime losses primarily attributable to the downturn in the global economy related to the effects of the COVID-19 pandemic. Inventories Inventories consist of the following (in thousands): June 30, December 31, 2020 2019 Aftermarket and refurbished products $ 1,895,922 $ 2,297,895 Salvage and remanufactured products 366,699 447,908 Manufactured products 25,672 26,974 Total inventories $ 2,288,293 $ 2,772,777 Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of June 30, 2020, manufactured products inventory was composed of $ 18 million of raw materials, $ 3 million of work in process, and $ 4 million of finished goods. As of December 31, 2019, manufactured products inventory was composed of $ 17 million of raw materials, $ 3 million of work in process, and $ 6 million of finished goods. Net Assets Held for Sale During 2019 and the first half of 2020, 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 total impairment charges of $ 2 million for each of the three and six months ended June 30, 2020 and $ 33 million and $ 49 million for the three and six months ended June 30, 2019 (presented in Loss on disposal of businesses and impairment of net assets held for sale in the Unaudited Condensed Consolidated Statements of Income). Excluding the Stahlgruber Czech Republic wholesale business discussed in Note 2, "Discontinued Operations," as of December 31, 2019, there were $ 19 million of assets held for sale and $ 9 million of liabilities held for sale, which were recorded within Prepaid expenses and other current assets and Other current liabilities, respectively, on the Unaudited Condensed Consolidated Balance Sheet. As of June 30, 2020, assets and liabilities held for sale were immaterial. In the second quarter of 2020, we completed the sale of one of these businesses, a non-core telecommunications operation in Germany, resulting in an immaterial loss on sale (presented in Loss on disposal of businesses and impairment of net assets held for sale in the Unaudited Condensed Consolidated Statements of Income). The disposed business was immaterial, generating annualized revenue of approximately $ 78 million during the twelve-month period ended May 31, 2020. 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 analyses 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 June 30, 2020. Intangible Assets Goodwill and indefinite-lived intangibles are tested for impairment at least annually, and we performed our annual impairment tests during the fourth quarter of 2019. Goodwill impairment testing may also be performed on an interim basis when events or circumstances arise that may lead to impairment. LKQ’s market capitalization declined by approximately 40 % 10 between February 20, 2020, when the Company released its 2019 financial results, and March 31, 2020. While we believed that the decrease was driven by market reaction to COVID-19, the magnitude of the market capitalization decrease was deemed to be a triggering event requiring an interim test of goodwill impairment in the first quarter. 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. At the time of our analysis, our projections for the interim impairment test assumed that the COVID-19 impact would be severe, with revenue down by as much as 50 % in the second quarter of 2020 compared to our prior forecast used in the 2019 impairment analysis, but temporary, as revenue would improve gradually in the second half of 2020. We expected that cost mitigation actions and cash preservation measures would dampen the negative impact of the projected revenue decline. Based on the interim test in the first quarter of 2020, we determined no impairments existed as all reporting units had a fair value estimate that exceeded the carrying value by at least 12 %, the level at which our Europe reporting unit exceeded its carrying value. We did not identify a triggering event in the second quarter that necessitated an interim test of goodwill impairment, as LKQ’s market capitalization increased by approximately 28 % between March 31 and June 30, 2020. Actual results for the second quarter were favorable relative to the forecast used in the first quarter interim test. 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 and finance lease right-of-use ("ROU") assets and 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 the commencement date in determining the present value of future payments. We determine our incremental borrowing rate by analyzing yield curves with consideration of lease term, country and company specific factors. The 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 year 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 lives 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 ROU asset or lease liability on the Unaudited Condensed Consolidated Balance Sheets; we recognize lease expense for these leases on a straight-line basis over the lease terms. In response to the COVID-19 global pandemic, we have secured rent relief from some of our lessors. The rent relief offered has most often been in the form of rent payment deferrals for one or more months to be paid back over a specified period of time ranging from one month to the remaining term of the lease. In accordance with FASB Staff Q&A - Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic ("FASB Staff Q&A") issued in April 2020, we are able to account for lease deferrals resulting directly from COVID-19 as if the enforceable rights and obligations for the deferrals existed in the respective contracts at lease inception as long as those concessions do not result in a substantial increase in our lease obligations. As a result, we have been able to apply the relief in most circumstances. Guidance from the FASB Staff Q&A provided methods to account for such rent deferrals, including the option to account for the lease as if no changes to the lease contract were made or to account for the deferred payments as variable lease payments. For the majority of our leases that were affected by rent relief actions, we elected to account for the deferrals as if no changes to the lease contract were made and continued to recognize lease expense, on a straight-line basis, during the deferral period. As of June 30, 2020, payment deferrals totaled $ 7 million and were recorded in Other current liabilities on the Unaudited Condensed Consolidated Balance Sheets. Other concessions consisting of abated rent or discounted rent, without payback, from various landlords of $ 2 million resulted in reductions to Selling, general and administrative expenses in our Unaudited Condensed Consolidated Statements of Income. 11 Investments in Unconsolidated Subsidiaries Our investment in unconsolidated subsidiaries was $ 137 million and $ 139 million as of June 30, 2020 and December 31, 2019, respectively. Europe Segment Our investment in unconsolidated subsidiaries in Europe was $ 121 million and $ 122 million as of June 30, 2020 and December 31, 2019, respectively. We recorded equity in losses of an immaterial amount and equity in earnings of $ 1 million during the three and six months ended June 30, 2020, respectively, and equity in earnings of $ 2 million and equity in losses of $ 38 million during the three and six months ended June 30, 2019, respectively, mainly related to our investment in Mekonomen AB ("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 June 30, 2020, 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 three months ended March 31, 2019, we recognized an other-than-temporary impairment charge of $ 40 million, which represented the difference between 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 price of SEK 65 as of March 31, 2019. The impairment charge was recorded in Equity in (losses) earnings of unconsolidated subsidiaries in our Unaudited Condensed Consolidated Statements of Income. Mekonomen announced in March 2020 that it would not make a dividend payment in 2020. The Level 1 fair value of our equity investment in the publicly traded Mekonomen common stock at June 30, 2020 was $ 99 million (using the Mekonomen share price of SEK 66 as of June 30, 2020) compared to a carrying value of $ 111 million. We evaluated our investment in Mekonomen for other-than-temporary impairment and concluded the decline in fair value was not other-than-temporary; however, a prolonged, material impairment may cause us to account for the decline as an other-than-temporary impairment in a future period, resulting in a charge in our Unaudited Condensed Consolidated Statements of Income. North America Segment Our investment in unconsolidated subsidiaries in the North America segment was $ 15 million and $ 18 million as of June 30, 2020 and December 31, 2019, respectively. We recorded equity in losses of $ 3 million during both the three and six months ended June 30, 2020, and equity in losses of $ 1 million and equity in earnings of an immaterial amount during the three and six months ended June 30, 2019, respectively, related to our North America equity method investments. Warranty Reserve Some of our salvage mechanical products are sold with a standard six month warranty against defects. Additionally, some of our remanufactured engines are sold with a standard three or four year warranty against defects. We also provide a limited lifetime warranty for certain of our aftermarket products. These assurance-type warranties are not considered a separate performance obligation, and thus no transaction price is allocated to them. We record the 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 thousands): Balance as of December 31, 2019 $ 25,441 Warranty expense 30,610 Warranty claims ( 27,189 ) Balance as of June 30, 2020 $ 28,862 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. 12 Government Assistance During the three months ended June 30, 2020, we recorded $ 33 million in financial assistance from foreign governments, primarily in the form of grants to offset personnel expenses in Europe and Canada. Financial assistance to be received from governments is recorded during the period in which we incur the costs which the assistance is intended to offset (and only if it is probable that we will meet the conditions required under the terms of the assistance). Of the $ 33 million recorded during the second quarter, $ 1 million and $ 32 million were reductions to Cost of goods sold and Selling, general and administrative expenses, respectively, in our Unaudited Condensed Consolidated Statement of Income. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was enacted in the U.S. to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. Similar legislation was enacted in many of the Company’s international jurisdictions. Tax m easures in these legislative actions did not have a material impact on the Company’s results of operations for the six months ended June 30, 2020. Those initiatives did provide the Company with the opportunity to defer the timing of certain income, indirect and payroll tax payments in various jurisdictions. As of June 30, 2020, $ 160 million and $ 114 million were recorded in Value added taxes payable and Income taxes payable, respectively, on our Unaudited Condensed Consolidated Balance Sheets, compared to $ 46 million and $ 27 million, respectively, as of December 31, 20 19. Approximately $ 175 million to $ 185 million of payments otherwise due in the second quarter of 2020 were deferred, of which we estimate approximately $ 125 million to $ 135 million will be paid during the third quarter of 2020, with the remainder to be paid in the fourth quarter or later. Stockholders' Equity Treasury Stock As of June 30, 2020, our Board of Directors had authorized a stock repurchase program under which we may purchase up to $ 1.0 billion of our common stock from time to time through October 25, 2022. 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. During the six months ended June 30, 2020, we repurchased 3.3 million shares of common stock for an aggregate price of $ 88 million; we did not repurchase any shares during the three months ended June 30, 2020. During the three and six months ended June 30, 2019, we repurchased 4.4 million and 7.0 million shares of common stock for an aggregate price of $ 120 million and $ 191 million, respectively. As of June 30, 2020, there was $ 560 million of remaining capacity under our repurchase program. Repurchased shares are accounted for as treasury stock using the cost method. Noncontrolling Interest In February 2020, as part of the sale of Stahlgruber's Czech Republic business, we divested the noncontrolling interest of the business, which resulted in a net decrease to Noncontrolling interest of $ 11 million in our unaudited condensed consolidated financial statements as of March 31, 2020. See Note 2, "Discontinued Operations," for further information. In December 2019, we modified the shares representing a noncontrolling interest in 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) exercisable by the minority shareholder in the fourth quarter of 2023, (ii) a call option for all noncontrolling interest shares at a fixed price of $ 26 million (€ 23 million) exercisable by the Company 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 exercise value outside of permanent equity on our Unaudited Condensed Consolidated Balance Sheets. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements During the first quarter of 2020, we adopted ASU No. 2016-13 and ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses" ("ASU 2018-19"). ASU 2016-13 significantly changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the prior “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. ASU 2018-19 affects 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 13 contractual right to receive cash. We applied ASU 2016-13 and ASU 2018-19 on a modified retrospective basis. As of January 1, 2020, we recorded a cumulative effect adjustment to retained earnings of $ 3 million. During the first quarter of 2020, we adopted 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. We adopted the provisions of ASU 2018-13 by applying a prospective approach. The adoption of ASU 2018-13 did not have a material impact on our unaudited condensed consolidated financial statements. Recently Issued Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12, "Income Taxes" (Topic 740) ("ASU 2019-12"), which simplifies the accounting for income taxes and adds guidance to reduce complexity in certain areas. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of this standard on our consolidated financial statements. In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"), which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. ASU 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made (i.e. as early as the first quarter 2020). Unlike other topics, the provisions of this update are only available until December 31, 2022, when the reference rate replacement activity is expected to have been completed. We are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures, and we have not yet elected an adoption date. Note 4. 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 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): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 North America $ 892,826 $ 1,165,482 $ 2,000,168 $ 2,321,180 Europe 1,206,330 1,510,952 2,564,299 2,951,793 Specialty 404,002 410,263 751,408 762,819 Parts and services 2,503,158 3,086,697 5,315,875 6,035,792 Other 123,165 161,476 311,383 312,684 Total revenue $ 2,626,323 $ 3,248,173 $ 5,627,258 $ 6,348,476 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 14 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 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, 2020 $ 27,067 Additional warranty revenue deferred 20,845 Warranty revenue recognized ( 22,473 ) Balance as of June 30, 2020 $ 25,439 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 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 and self service recycling operations is recognized based on a price per ton of delivered material 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 14, "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 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 $ 104 million and $ 58 million, respectively, as of June 30, 2020, and $ 97 million and $ 52 million, respectively, as of December 31, 2019. 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 $ 72 million and $ 108 million as of June 30, 2020 and December 31, 2019, 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 unaudited condensed consolidated financial statements. Note 5. Restructuring and Acquisition Related Expenses 2019 Global Restructuring Program In the second quarter of 2019, we implemented 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 of earlier than the end of the previously estimated useful lives. During the three and six months ended June 30, 2020, we incur red $ 2 million and $ 5 million, re spectively, of restructuring expenses under this program, primarily related to facility exit costs and employee-related costs. In the three months ended June 30, 2019, costs under the program totaled $ 5 million, primarily for employee severance. These costs were recorded within Restructuring and acquisition related expenses in the Unaudited Condensed Consolidated Statements of Income during the three and six months ended June 30, 2020 and 2019. We expect to incur between $ 2 million and $ 4 million of future costs through 2021 to complete the program, and total program costs will be approximately $ 45 million ($ 37 million was 15 incurred during the year ended December 31, 2019). Of the cumulative program costs incurred to date, $ 27 million, $ 14 million and $ 1 million related to our Europe, North America and Specialty segments, respectively. 2020 Global Restructuring Program Beginning in the first quarter of 2020, we initiated a further restructuring program aimed at cost reductions across all our reportable segments through the elimination of underperforming assets and cost inefficiencies. These actions are incremental to those initiated as part of the 2019 Global Restructuring Program, and include 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. We expanded this program during the second quarter as we identified additional opportunities to eliminate inefficiencies, including actions in response to impacts to our business from COVID-19. During the three and six months ended June 30, 2020, we recognized restructuring expenses totaling $ 25 million and $ 27 million, respectively, for employee-related costs, facility exit costs and inventory write-downs. Of these expenses, $ 6 million resulted from inventory impairment charges related to facility consolidation actions and brand rationalizations and was recorded in Cost of goods sold in the Unaudited Condensed Consolidated Statement of Income for the three months ended June 30, 2020. Of the cumulative program costs incurred to date, $ 17 million, $ 10 million and $ 1 million related to our North America, Europe and Specialty segments, respectively. We estimate total costs under the program through its expected completion date in 2022 will be between $ 65 million and $ 75 million, of which approximately $ 40 million, $ 28 million, and $ 1 million will be incurred by our Europe, North America and Specialty segments, respectively. Acquisition Integration Plans During the three and six months ended June 30, 2020, we incurre d $ 4 million and $ 5 million of restructuring expenses, respectively, for our acquisition integration plans. These expenses were primarily related to the integ ration of our operations in Belgium. Future expenses to complete our existing integration plans are expected to be immaterial. During the three and six months ended June 30, 2019, we incurred $ 3 million and $ 6 million of restructuring expenses, respectively, related to our acquisition integration efforts. These expenses included approximately $ 1 million and $ 3 million for the three and six months ended June 30, 2019, respectively, related to the integration of our acquisition of Andrew Page Limited. 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 continue to expect to incur between $ 45 million and $ 55 million in total per sonnel and inventory related restructuring charges through 2024 as a result of executing the 1 LKQ Europe program. Certain projects were delayed in March 2020 in response to the COVID-19 pandemic. Based on our expectations in the second quarter of 2020 that the impacts on our business from COVID-19 had stabilized, we restarted the program in July 2020 with substantially the same initiatives and projects as prior to the pandemic, although we are evaluating the impact of the delay on our estimates of the related expenditures and timelines. We may also 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. Note 6. 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”). 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, the Company must report positive diluted earnings per share, subject to certain adjustments, during any fiscal year period within five years following the grant 16 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 fair value of RSUs that vested during the six months ended June 30, 2020 was $ 17 million ; 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 six months ended June 30, 2020: Number Outstanding Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) (1) Unvested as of January 1, 2020 1,612,026 $ 31.72 Granted 887,907 $ 31.71 Vested ( 550,661 ) $ 30.94 Forfeited / Canceled ( 77,143 ) $ 32.81 Unvested as of June 30, 2020 1,872,129 $ 31.90 Expected to vest after June 30, 2020 1,660,511 $ 31.83 3.1 $ 43,505 (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. In 2019 and 2020, 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 applicable three year performance periods. The following table summarizes activity related to our PSUs under the Equity Incentive Plan for the six months ended June 30, 2020: Number Outstanding Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) (1) Unvested as of January 1, 2020 136,170 $ 27.69 Granted (2) 164,152 $ 31.85 Forfeited / Canceled ( 7,375 ) $ 29.65 Unvested as of June 30, 2020 292,947 $ 29.97 Expected to vest after June 30, 2020 292,947 $ 29.97 2.0 $ 7,675 (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. 17 Stock Options Stock options vested over periods of up to five years , subject to a continued service condition. Stock options expired either six years or ten years from the date they were granted. No options were granted during the six months ended June 30, 2020. No options vested during the six months ended June 30, 2020. The following table summarizes activity related to our stock options under the Equity Incentive Plan for the six months ended June 30, 2020: Number Outstanding Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Balance as of January 1, 2020 114,594 $ 12.26 Exercised ( 112,472 ) $ 11.88 $ 2,629 Canceled ( 2,122 ) $ 32.31 Balance as of June 30, 2020 — $ — — $ — All stock options were exercised or canceled as of March 31, 2020. Stock-Based Compensation Expense Pre-tax stock-based compensation expense for RSUs and PSUs totaled $ 8 million and $ 16 million for the three and six months ended June 30, 2020, respectively, and $ 8 million and $ 14 million for the three and six months ended June 30, 2019, respectively. As of June 30, 2020, unrecognized compensation expense related to unvested RSUs and PSUs was $ 51 million . Stock-based compensation expense related to these awards will be different to the extent that forfeitures ar e realized and performance under the PSUs differs from target. Note 7. Earnings Per Share The following chart sets forth the computation of earnings per share (in thousands, except per share amounts): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Income from continuing operations $ 118,493 $ 151,707 $ 265,387 $ 250,770 Denominator for basic earnings per share—Weighted-average shares outstanding 304,001 311,891 305,123 313,460 Effect of dilutive securities: RSUs 189 315 352 364 PSUs — — — — Stock options — 513 2 536 Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding 304,190 312,719 305,477 314,360 Basic earnings per share from continuing operations $ 0.39 $ 0.49 $ 0.87 $ 0.80 Diluted earnings per share from continuing operations (1) $ 0.39 $ 0.49 $ 0.87 $ 0.80 (1) Diluted earnings per share from continuing operations was computed using the treasury stock method for dilutive securities. 18 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 and six months ended June 30, 2020 and 2019 (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Antidilutive securities: RSUs 1,444 559 913 579 Stock options — 32 — 32 Note 8. Accumulated Other Comprehensive Income (Loss) The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands): Three Months Ended June 30, 2020 Foreign Currency Translation Unrealized (Loss) Gain on Cash Flow Hedges Unrealized (Loss) Gain on Pension Plans Other Comprehensive (Loss) Income from Unconsolidated Subsidiaries Accumulated Other Comprehensive (Loss) Income Beginning balance $ ( 274,858 ) $ ( 1,963 ) $ ( 31,814 ) $ ( 5,268 ) $ ( 313,903 ) Pretax income (loss) 30,663 ( 7,807 ) — — 22,856 Income tax effect — 1,842 — — 1,842 Reclassification of unrealized loss — 7,761 2,655 — 10,416 Reclassification of deferred income taxes — ( 1,827 ) ( 780 ) — ( 2,607 ) Disposal of business 671 — — — 671 Other comprehensive income from unconsolidated subsidiaries — — — 962 962 Ending balance $ ( 243,524 ) $ ( 1,994 ) $ ( 29,939 ) $ ( 4,306 ) $ ( 279,763 ) Three Months Ended June 30, 2019 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 Beginning balance $ ( 187,492 ) $ 11,637 $ ( 7,884 ) $ ( 7,115 ) $ ( 190,854 ) Pretax income (loss) 5,602 ( 9,418 ) — — ( 3,816 ) Income tax effect — 2,230 — — 2,230 Reclassification of unrealized loss — 2,013 37 — 2,050 Reclassification of deferred income taxes — ( 475 ) ( 9 ) — ( 484 ) Other comprehensive income from unconsolidated subsidiaries — — — 2,321 2,321 Ending balance $ ( 181,890 ) $ 5,987 $ ( 7,856 ) $ ( 4,794 ) $ ( 188,553 ) 19 Six Months Ended June 30, 2020 Foreign Currency Translation Unrealized Gain (Loss) on Cash Flow Hedges Unrealized (Loss) Gain on Pension Plans Other Comprehensive Loss from Unconsolidated Subsidiaries Accumulated Other Comprehensive (Loss) Income Beginning balance $ ( 170,893 ) $ 5,358 $ ( 31,934 ) $ ( 3,416 ) $ ( 200,885 ) Pretax loss ( 73,397 ) ( 3,625 ) — — ( 77,022 ) Income tax effect — 858 — — 858 Reclassification of unrealized (gain) loss — ( 5,946 ) 2,769 — ( 3,177 ) Reclassification of deferred income taxes — 1,361 ( 774 ) — 587 Disposal of business 766 — — — 766 Other comprehensive loss from unconsolidated subsidiaries — — — ( 890 ) ( 890 ) Ending balance $ ( 243,524 ) $ ( 1,994 ) $ ( 29,939 ) $ ( 4,306 ) $ ( 279,763 ) Six Months Ended June 30, 2019 Foreign Currency Translation Unrealized Gain (Loss) on Cash Flow Hedges Unrealized (Loss) Gain on Pension Plans Other Comprehensive Loss from Unconsolidated Subsidiaries Accumulated Other Comprehensive (Loss) Income Beginning balance $ ( 177,597 ) $ 14,374 $ ( 8,075 ) $ ( 3,652 ) $ ( 174,950 ) Pretax (loss) income ( 4,293 ) 6,175 — — 1,882 Income tax effect — ( 1,424 ) — — ( 1,424 ) Reclassification of unrealized (gain) loss — ( 17,175 ) 290 — ( 16,885 ) Reclassification of deferred income taxes — 4,037 ( 71 ) — 3,966 Other comprehensive loss from unconsolidated subsidiaries — — — ( 1,142 ) ( 1,142 ) Ending balance $ ( 181,890 ) $ 5,987 $ ( 7,856 ) $ ( 4,794 ) $ ( 188,553 ) The amounts of unrealized gains and losses on our Cash Flow Hedges reclassified to our Unaudited Condensed Consolidated Statements of Income are as follows (in thousands): Three Months Ended Six Months Ended June 30, June 30, Classification 2020 2019 2020 2019 Unrealized (losses) gains on interest rate swaps Interest expense, net of interest income $ ( 1,769 ) $ 1,763 $ 1,527 $ 3,455 Unrealized gains on cross currency swaps Interest expense, net of interest income 2,796 4,319 5,347 8,649 Unrealized (losses) gains on cross currency swaps (1) Other income, net ( 8,788 ) ( 8,095 ) ( 928 ) 5,071 Total $ ( 7,761 ) $ ( 2,013 ) $ 5,946 $ 17,175 (1) The amounts reclassified to Other income, net in our Unaudited Condensed 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 Other income, net in our Consolidated Statements of Income during each of the six months ended June 30, 2020 and 2019. 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. 20 Note 9. Long-Term Obligations Long-term obligations consist of the following (in thousands): June 30, December 31, 2020 2019 Senior secured credit agreement: Term loans payable $ 332,500 $ 341,250 Revolving credit facilities 1,138,928 1,268,008 U.S. Notes (2023) — 600,000 Euro Notes (2024) 561,700 560,650 Euro Notes (2026/28) 1,123,400 1,121,300 Receivables securitization facility — — Notes payable through October 2030 at weighted average interest rates of 3.1% and 3.2%, respectively 27,202 26,971 Finance lease obligations at weighted average interest rates of 3.9% and 4.1%, respectively 43,472 40,837 Other debt at weighted average interest rates of 1.3% and 1.8%, respectively 51,251 113,010 Total debt 3,278,453 4,072,026 Less: long-term debt issuance costs ( 27,208 ) ( 29,990 ) Less: current debt issuance costs ( 320 ) ( 280 ) Total debt, net of debt issuance costs 3,250,925 4,041,756 Less: current maturities, net of debt issuance costs ( 93,200 ) ( 326,367 ) Long term debt, net of debt issuance costs $ 3,157,725 $ 3,715,389 Senior Secured Credit Agreement On June 11, 2020, LKQ Corporation and certain other subsidiaries of LKQ (collectively, the "Borrowers") entered into Amendment No. 4 to the Fourth Amended and Restated Credit Agreement dated January 29, 2016 (the "Credit Agreement"), which modifies the maximum permitted net leverage ratio through the quarter ending September 30, 2021. Prior to the amendment, the maximum permitted net leverage ratio was 4.00 :1.00. After the amendment, the maximum permitted net leverage ratio is (i) 5.00 :1.00 for the quarters ending June 30, 2020, September 30, 2020, December 31, 2020 and March 31, 2021, (ii) 4.50 :1.00 for the quarter ending June 30, 2021, and (iii) 4.25 :1.00 for the quarter ending September 30, 2021. Beginning with the quarter ending December 31, 2021, the maximum permitted net leverage ratio reverts to the terms in effect prior to the amendment. In the event that the net leverage ratio is greater than 4.00 :1.00, the Company would be restricted from repurchasing its shares. We can at any time elect to cancel the modifications to the maximum permitted net leverage ratio and revert to the terms in effect prior to the amendment subject to compliance with the 4.00 :1.00 ratio. Amendment No. 4 to the Credit Agreement also made certain other immaterial modifications. The total availability under the revolving credit facility's multicurrency component is $ 3.15 billion. Amounts outstanding under the revolving credit facility are due and payable upon maturity of the Credit Agreement on January 29, 2024. Term loan borrowings, which totaled $ 333 million as of June 30, 2020, 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. 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 10, "Derivative Instruments and Hedging Activities," the weighted average interest rates on borrowings outstanding under the Credit Agreement at June 30, 2020 and December 31, 2019 were 1.5 % and 1.6 %, respectively. We also pay a commitment fee based 21 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 both June 30, 2020 and December 31, 2019. As of June 30, 2020, there were letters of credit outstanding in the aggregate amount of $ 70 million. The amounts available under the revolving credit facilities are reduced by the amounts outstanding under letters of credit, and thus availability under the revolving credit facilities at June 30, 2020 was $ 1.9 billion. Related to the execution of Amendment No. 4 to the Fourth Amended and Restated Credit Agreement in June 2020, 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. 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 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 recorded a loss on debt extinguishment of $ 13 million on the Unaudited Condensed Consolidated Statements of Income 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 22 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 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 rates 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 (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). Receivables Securitization Facility On December 20, 2018, we amended the terms of our receivables securitization facility with MUFG Bank, Ltd. ("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 Unaudited Condensed 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. Net receivables totaling 23 $ 104 million and $ 132 million were collateral for the investments under the receivables facility as of as June 30, 2020 and December 31, 2019, respectively. 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) London Interbank Offered Rate ("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. There was no outstanding balance as of June 30, 2020 or December 31, 2019. Note 10. 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. 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, net of interest income when the underlying interest payment has an impact on earnings. Our interest rate swap contracts have maturity dates in January 2021 and June 2021. 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 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, net of 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. The activity related to our cash flow hedges is presented in operating activities in our Unaudited Condensed Consolidated Statements of Cash Flows. The following tables summarize the notional amounts and fair values of our designated cash flow hedges as of June 30, 2020 and December 31, 2019 (in thousands): Notional Amount Fair Value at June 30, 2020 (USD) June 30, 2020 Other Current Assets Other Noncurrent Assets Other Accrued Expenses Other Noncurrent Liabilities Interest rate swap agreements USD denominated $ 480,000 $ — $ — $ 3,005 $ — Cross currency swap agreements USD/euro $ 458,689 2,717 — 24,559 — Total cash flow hedges $ 2,717 $ — $ 27,564 $ — 24 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 $ 480,000 $ — $ 3,262 $ — $ — Cross currency swap agreements USD/euro $ 466,621 2,975 181 970 23,349 Total cash flow hedges $ 2,975 $ 3,443 $ 970 $ 23,349 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 Unaudited Condensed 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 accrued expenses on our Unaudited Condensed Consolidated Balance Sheets of $ 3 million and $ 1 million at June 30, 2020 and December 31, 2019, respectively. 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 Unaudited Condensed Consolidated Balance Sheets of $ 1 million at December 31, 2019; there would be no impact at June 30, 2020. The activity related to our cash flow hedges is included in Note 8, "Accumulated Other Comprehensive Income (Loss)." As of June 30, 2020, we estimate that we will reclassify an immaterial amount of derivative losses (net of tax) from Accumulated Other Comprehensive Income (Loss) to Interest expense, net of interest income in our Unaudited Condensed Consolidated Statements of Income within the next 12 months. We estimate that we will also reclassify $ 2 million of derivative losses (net of tax) from Accumulated Other Comprehensive Income (Loss) to Other income, net in our Unaudited Condensed Consolidated Statements of Income within the next 12 months; the reclassification of derivative losses to 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 June 30, 2020 and December 31, 2019, along with the effect on our results of operations during the three and six months ended June 30, 2020 and 2019, were immaterial. Note 11. Fair Value Measurements Financial Assets and Liabilities Measured at Fair Value We use the market and income approaches to estimate the fair value of our financial assets and liabilities, and during the three and six months ended June 30, 2020, 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. 25 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 June 30, 2020 and December 31, 2019 (in thousands): Balance as of June 30, 2020 Fair Value Measurements as of June 30, 2020 Level 1 Level 2 Level 3 Assets: Cash surrender value of life insurance $ 59,599 $ — $ 59,599 $ — Cross currency swap agreements 2,717 — 2,717 — Total Assets $ 62,316 $ — $ 62,316 $ — Liabilities: Contingent consideration liabilities $ 11,914 $ — $ — $ 11,914 Interest rate swaps 3,005 — 3,005 — Deferred compensation liabilities 63,863 — 63,863 — Cross currency swap agreements 24,559 — 24,559 — Total Liabilities $ 103,341 $ — $ 91,427 $ 11,914 Balance as of December 31, 2019 Fair Value Measurements as of December 31, 2019 Level 1 Level 2 Level 3 Assets: Cash surrender value of life insurance $ 60,637 $ — $ 60,637 $ — Interest rate swaps 3,262 — 3,262 — Cross currency swap agreements 3,156 — 3,156 — Total Assets $ 67,055 $ — $ 67,055 $ — Liabilities: Contingent consideration liabilities $ 11,539 $ — $ — $ 11,539 Deferred compensation liabilities 63,981 — 63,981 — Cross currency swap agreements 24,319 — 24,319 — Total Liabilities $ 99,839 $ — $ 88,300 $ 11,539 The cash surrender value of life insurance is included in Other noncurrent assets on our Unaudited Condensed Consolidated Balance Sheets. The current portion of contingent consideration liabilities is included in Other current liabilities on our Unaudited Condensed Consolidated Balance Sheets; the noncurrent portion of deferred compensation liabilities and contingent consideration liabilities is included in Other noncurrent liabilities on our Unaudited Condensed 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 10, "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 Unaudited Condensed Consolidated Balance Sheets at cost. Based on market conditions as of both June 30, 2020 and December 31, 2019, the fair value of our credit agreement borrowings reasonably approximated the 26 carrying values of $ 1.5 billion and $ 1.6 billion, respectively. As of June 30, 2020 and December 31, 2019 there were no outstanding borrowings under the receivables facility. As of December 31, 2019, the fair value of the U.S. Notes (2023) was approximately $ 609 million compared to a carrying value of $ 600 million ; as of June 30, 2020, there were no outstanding borrowings on the U.S. Notes (2023). As of June 30, 2020 and December 31, 2019, the fair values of the Euro Notes (2024) were approximately $ 583 million and $ 632 million, respectively, compared to carrying values of $ 562 million and $ 561 million, respectively. As of June 30, 2020 and December 31, 2019, the fair value of the Euro Notes (2026/28) was $ 1.2 billion at each date, compared to a carrying value of $ 1.1 billion at each date. 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 June 30, 2020 and December 31, 2019 to assume these obligations. The fair value of our U.S. Notes (2023) was classified as Level 1 within the fair value hierarchy since it was 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. Note 12. Employee Benefit Plans We have funded and unfunded defined benefit plans covering certain employee groups in the U.S. and various European countries. Local statutory requirements govern many of our European plans. The defined benefit plans are mostly closed to new participants and, in some cases, existing participants no longer accrue benefits. As of each of June 30, 2020 and December 31, 2019, the aggregate funded status of the defined benefit plans was a liability of $ 142 million, and is reported in Other noncurrent liabilities and Accrued payroll-related liabilities on our Unaudited Condensed Consolidated Balance Sheets. On June 28, 2019, we approved an amendment to terminate our primary defined benefit plan in the U.S. (the "U.S. Plan") and to freeze all related benefit accruals, effective June 30, 2019. 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. During the quarter ended June 30, 2020, participants were able to elect lump-sum distributions. As a result of these elections and subsequent payments, we reclassified $ 2 million of unrealized loss from Accumulated Other Comprehensive Income to Other income, net in our Unaudited Condensed Consolidated Statements of Income as of June 30, 2020 to reflect the partial settlement of the plan. We expect to settle the remaining obligations under the plan by the end of 2020 through the purchase of annuity contracts. Actuarial valuations to support settlement entries will be completed upon the finalization of lump sum distributions during the third quarter of 2020 and then additionally in the fourth quarter upon the purchase of annuity contracts. We expect that these valuations will result in additional charges recognized through Other income, net, but are unable to quantify them at this time. Net periodic benefit cost for our defined benefit plans included the following components for the three and six months ended June 30, 2020 and 2019 (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Service cost $ 856 $ 1,074 $ 1,526 $ 1,661 Interest cost 731 1,010 1,449 1,995 Expected return on plan assets ( 662 ) ( 560 ) ( 1,140 ) ( 1,340 ) Amortization of actuarial loss 555 37 669 290 Settlement loss 2,100 — 2,100 — Net periodic benefit cost $ 3,580 $ 1,561 $ 4,604 $ 2,606 For the three and six months ended June 30, 2020 and 2019, 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 Other income, net in our Unaudited Condensed Consolidated Statements of Income. 27 Note 13. Income Taxes At the end of each interim period, we estimate our annual effective tax rate and apply that rate to our interim earnings. We also record the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and the effects of changes in tax laws or rates, in the interim period in which they occur. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in state and foreign jurisdictions, permanent and temporary differences between book and taxable income, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes. Our effective income tax rate for the six months ended June 30, 2020 was 27.7 % , compared to 27.1 % for the comparable prior year period. The increase is attributable to a higher expected annual effective tax rate in 2020 as a result of the estimated unfavorable impa ct of the COVID-19 pandemic on the Company’s results of operations. The primary factor in the increase is the impact of lower available interest deductions in certain foreign jurisdictions due to legislative thin capitalization constraints, typically based on profitability. For the six months ended June 30, 2020, the effective tax rate was reduced 0.3 % by favorable discrete items, primarily excess tax benefits on stock-based compensation and deferred tax adjustments as a result of statutory tax rate changes. Net discrete items for the six months ended June 30, 2019 added 0.1 % to the effective tax rate. Ongoing uncertainties due to the impact of the COVID-19 p andemic on the Company’s operations for the remainder of 2020 may result in volatile effective tax rates driven generally by the level of profitability and changes in the mix of earnings across the Company’s jurisdictions. 28 Note 14. 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): North America Europe Specialty Eliminations Consolidated Three Months Ended June 30, 2020 Revenue: Third Party $ 1,011,136 $ 1,211,185 $ 404,002 $ — $ 2,626,323 Intersegment 259 — 872 ( 1,131 ) — Total segment revenue $ 1,011,395 $ 1,211,185 $ 404,874 $ ( 1,131 ) $ 2,626,323 Segment EBITDA $ 149,554 $ 89,387 $ 52,233 $ — $ 291,174 Depreciation and amortization (1) 25,050 40,493 7,387 — 72,930 Three Months Ended June 30, 2019 Revenue: Third Party $ 1,321,670 $ 1,516,240 $ 410,263 $ — $ 3,248,173 Intersegment 96 — 1,373 ( 1,469 ) — Total segment revenue $ 1,321,766 $ 1,516,240 $ 411,636 $ ( 1,469 ) $ 3,248,173 Segment EBITDA $ 190,048 $ 116,281 $ 52,367 $ — $ 358,696 Depreciation and amortization (1) 22,425 46,774 6,955 — 76,154 North America Europe Specialty Eliminations Consolidated Six Months Ended June 30, 2020 Revenue: Third Party $ 2,301,071 $ 2,574,779 $ 751,408 $ — $ 5,627,258 Intersegment 519 — 2,048 ( 2,567 ) — Total segment revenue $ 2,301,590 $ 2,574,779 $ 753,456 $ ( 2,567 ) $ 5,627,258 Segment EBITDA $ 360,992 $ 167,649 $ 84,465 $ — $ 613,106 Depreciation and amortization (1) 48,198 81,588 14,523 — 144,309 Six Months Ended June 30, 2019 Revenue: Third Party $ 2,623,876 $ 2,961,781 $ 762,819 $ — $ 6,348,476 Intersegment 199 — 2,554 ( 2,753 ) — Total segment revenue $ 2,624,075 $ 2,961,781 $ 765,373 $ ( 2,753 ) $ 6,348,476 Segment EBITDA $ 366,684 $ 221,579 $ 90,326 $ — $ 678,589 Depreciation and amortization (1) 44,664 93,785 13,912 — 152,361 (1) Amounts presented include depreciation and amortization expense recorded within cost of goods sold and restructuring expense. 29 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. The table below provides a reconciliation of Net Income to EBITDA and Segment EBITDA (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net income $ 118,770 $ 152,105 $ 264,749 $ 251,168 Less: net (loss) income attributable to continuing noncontrolling interest ( 22 ) 1,352 718 2,367 Less: net income attributable to discontinued noncontrolling interest — 192 103 192 Net income attributable to LKQ stockholders 118,792 150,561 263,928 248,609 Subtract: Net income (loss) from discontinued operations 277 398 ( 638 ) 398 Net income attributable to discontinued noncontrolling interest — ( 192 ) ( 103 ) ( 192 ) Net income from continuing operations attributable to LKQ stockholders 118,515 150,355 264,669 248,403 Add: Depreciation and amortization 65,747 70,834 131,242 141,836 Depreciation and amortization - cost of goods sold 4,010 5,320 9,095 10,525 Depreciation and amortization - restructuring expenses (1) 3,173 — 3,972 — Interest expense, net of interest income 25,616 35,884 51,547 71,973 Loss on debt extinguishment — — 12,751 — Provision for income taxes 41,869 55,825 102,280 107,375 EBITDA 258,930 318,218 575,556 580,112 Subtract: Equity in (losses) earnings of unconsolidated subsidiaries (2) ( 2,649 ) 1,572 ( 2,133 ) ( 37,977 ) Add: Restructuring and acquisition related expenses (1) 21,777 8,377 27,948 11,684 Restructuring expenses - cost of goods sold 5,665 — 5,661 — Loss on disposal of businesses and impairment of net assets held for sale (3) 2,485 33,497 2,236 48,520 Change in fair value of contingent consideration liabilities ( 332 ) 176 ( 428 ) 296 Segment EBITDA $ 291,174 $ 358,696 $ 613,106 $ 678,589 (1) The sum of these two captions represents the total amount that is reported in Restructuring and acquisition related expenses in our Unaudited Condensed Consolidated Statements of Income. Refer to Note 5, "Restructuring and Acquisition Related Expenses," for further information. (2) Refer to "Investments in Unconsolidated Subsidiaries" in Note 3, "Financial Statement Information," for further information. (3) Refer to "Net Assets Held for Sale" in Note 3, "Financial Statement Information," for further information. 30 The following table presents capital expenditures by reportable segment (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Capital Expenditures North America $ 10,892 $ 23,169 $ 40,213 $ 54,403 Europe 19,502 21,840 32,550 41,417 Specialty 2,369 3,243 4,538 5,448 Total capital expenditures $ 32,763 $ 48,252 $ 77,301 $ 101,268 The following table presents assets by reportable segment (in thousands): June 30, December 31, 2020 2019 Receivables, net North America $ 355,421 $ 419,452 Europe 629,355 636,216 Specialty 141,040 75,464 Total receivables, net 1,125,816 1,131,132 Inventories North America 829,049 991,062 Europe 1,223,628 1,401,801 Specialty 235,616 379,914 Total inventories 2,288,293 2,772,777 Property, plant and equipment, net North America 587,230 610,573 Europe 527,255 538,951 Specialty 82,020 84,876 Total property, plant and equipment, net 1,196,505 1,234,400 Operating lease assets, net North America 756,128 768,164 Europe 434,221 457,035 Specialty 82,164 83,312 Total operating lease assets, net 1,272,513 1,308,511 Equity method investments North America 15,299 17,624 Europe 121,374 121,619 Total equity method investments 136,673 139,243 Other unallocated assets 6,015,499 6,193,893 Total assets $ 12,035,299 $ 12,779,956 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 Germany and the U.K. 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 31 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): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenue United States $ 1,330,543 $ 1,613,417 $ 2,864,489 $ 3,155,443 Germany 359,134 415,947 733,686 802,412 United Kingdom 278,419 409,765 669,038 822,578 Other countries 658,227 809,044 1,360,045 1,568,043 Total revenue $ 2,626,323 $ 3,248,173 $ 5,627,258 $ 6,348,476 The following table sets forth our tangible long-lived assets by geographic area (in thousands): June 30, December 31, 2020 2019 Long-lived assets United States $ 1,435,244 $ 1,467,701 Germany 340,681 340,995 United Kingdom 286,952 330,113 Other countries 406,141 404,102 Total long-lived assets $ 2,469,018 $ 2,542,911 32