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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-02-27 · 375 added, 525 removed, 320 unchanged (74% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and notes thereto included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.

Discussion of 2018 items and the year-over-year comparison of changes in our financial condition and the results of operations as of and for the years ended December 31, 2019 and December 31, 2018 can be found in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 27, 2020.

We are a global distributor of vehicle products, including replacement parts, components and systems used in the repair and maintenance of vehicles, and specialty products and accessories to improve the performance, functionality and appearance of vehicles.

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We are a leading provider of alternative vehicle collision replacement products and alternative vehicle mechanical replacement products, with our sales, processing, and distribution facilities reaching most major markets in the United States and Canada.

We are also a leading provider of alternative vehicle replacement and maintenance products in the United Kingdom, Germany, the Benelux region (Belgium, Netherlands, and Luxembourg), Italy, Czech Republic, Poland, Slovakia, Austria, and various other European countries.

We are also a leading provider of alternative vehicle replacement and maintenance products in Germany, the United Kingdom, the Benelux region (Belgium, Netherlands, and Luxembourg), Italy, Czech Republic, Austria, Slovakia, Poland, and various other European countries.

In addition to our wholesale operations, we operate self service retail facilities across the U.S.

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Our operating results have fluctuated on a quarterly and annual basis in the past and can be expected to continue to fluctuate in the future as a result of a number of factors, some of which are beyond our control.

Please refer to the factors referred to in Forward-Looking Statements above.

Please refer to the factors referred to in Forward-Looking Statements and Risk Factors above.

Due to these factors and others, which may be unknown to us at this time, our operating results in future periods can be expected to fluctuate.

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Since our inception in 1998, we have pursued a growth strategy through both organic growth and acquisitions.

We have pursued acquisitions that we believe will help drive profitability, cash flow and stockholder value.

We target companies that are market leaders, will expand our geographic presence and will enhance our ability to provide a wide array of vehicle products to our customers through our distribution network.

During 2019, we completed seven acquisitions for a total consideration of $63 million, including three wholesale businesses and one self service business in North America, and three wholesale businesses in Europe.

Through 2018, our acquisition strategy was focused on consolidation to build scale in fragmented markets across North America and Europe.

We targeted companies that were market leaders, expanded our geographic presence and enhanced our ability to provide a wide array of vehicle products through our distribution network.

In the last few years, we have shifted our focus from larger transactions to tuck-in acquisitions that target high synergies and/or add critical capabilities.

Additionally, we have made investments in various businesses to advance our strategic objectives.

On May 30, 2018, we acquired Stahlgruber, a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories with operations in Germany, Austria, Italy, Slovenia, and Croatia with further sales to Switzerland.

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In addition, this acquisition should allow for continued improvement in procurement, logistics and infrastructure optimization.

On July 3, 2017, we acquired four parts distribution businesses in Belgium.

These companies were acquired with the objective of transforming the existing three-step distribution model in Belgium to a two-step distribution model to align with our Netherlands operations.

On November 1, 2017, we acquired the aftermarket business of Warn, a leading designer, manufacturer and marketer of high performance vehicle equipment and accessories.

This acquisition expanded LKQ's presence in the specialty market and created viable points of entry into related markets.

On April 21, 2016, we acquired PGW, a leading global distributor and manufacturer of automotive glass products.

PGW’s business comprised aftermarket automotive replacement glass distribution services and automotive glass manufacturing.

On March 1, 2017, we sold the automotive glass manufacturing component of PGW.

Unless otherwise noted, the discussion related to PGW throughout Part II, Item 7 of this Annual Report on Form 10-K refers to the aftermarket glass distribution operations of PGW, PGW autoglass, which is included within continuing operations.

See Note 3, "Discontinued Operations " in Item 8 of this Annual Report on Form 10-K for further information related to our discontinued operations.

The acquisition of PGW autoglass expanded our addressable market in North America and provided distribution synergies with our existing network.

In October 2016, we acquired substantially all of the business assets of Andrew Page Limited ("Andrew Page"), a distributor of aftermarket automotive parts in the United Kingdom.

Competition and Markets Authority ("CMA") concluded its review of this acquisition on October 31, 2017 and required us to divest less than 10% of the acquired locations.

We divested the required locations during 2018.

In addition to the significant acquisitions mentioned above, during the years ended December 31, 2019, 2018, and 2017, we acquired various smaller businesses across our North America, Europe, and Specialty segments.

On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen AB ("Mekonomen"), the leading independent car parts and service chain in the Nordic region of Europe, offering a wide range of quality products including spare parts and accessories for cars, and workshop services for consumers and businesses.

We acquired additional shares in the fourth quarter of 2018, increasing our equity interest to 26.6%.

We are accounting for our interest in Mekonomen using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over the investee.

In addition to the acquisition mentioned above, during the years ended December 31, 2020, 2019 and 2018, we acquired various smaller businesses across our North America, Europe, and Specialty segments.

See Note 2, "Business Combinations" and "Investments in Unconsolidated Subsidiaries" in Note 4, "Summary of Significant Accounting Policies," to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to our acquisitions and investments.

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Our parts revenue is generated from the sale of vehicle products, including replacement parts, components and systems used in the repair and maintenance of vehicles, and specialty products and accessories to improve the performance, functionality and appearance of vehicles.

Our service revenue is generated primarily from the sale of service-type warranties, fees for admission to our self service yards, diagnostic and repair services, and processing fees related to the secure disposal of vehicles.

Our service revenue is generated primarily from the sale of service-type warranties, fees for admission to our self service yards, and diagnostic and repair services.

During the year ended December 31, 2020, parts and services revenue represented approximately 94% of our consolidated revenue.

Revenue from other sources includes scrap sales, bulk sales to mechanical manufacturers (including cores), and sales of aluminum ingots and sows from our furnace operations.

Revenue from other sources includes scrap and other metals sales, bulk sales to mechanical manufacturers (including cores) and sales of aluminum ingots and sows from our furnace operations.

Other revenue will vary from period to period based on fluctuations in commodity prices and the volume of materials sold.

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The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.

On an ongoing basis, we evaluate our estimates, assumptions, and judgments, including those related to revenue recognition, inventory valuation, business combinations and goodwill impairment.

On an ongoing basis, we evaluate our estimates, assumptions, and judgments, including those related to revenue recognition, inventory valuation, lease accounting, business combinations and goodwill impairment.

We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances.

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If actual demand differs from our estimates, additional reductions to inventory carrying value would be necessary in the period such determination is made.

For all of our aftermarket products, excluding our aftermarket automotive glass products, cost is established based on the average price we pay for parts;

For our aftermarket products, excluding our aftermarket automotive glass products, cost is established based on the average price we pay for parts;

for our aftermarket automotive glass products inventory, cost is established using the first-in first-out method.

Inventory cost for all of our aftermarket products includes expenses incurred for freight in and overhead costs;

Inventory cost for our aftermarket products includes expenses incurred for freight in and overhead costs;

for items purchased from foreign companies, import fees and duties and transportation insurance are also included.

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Our salvage inventory cost is established based upon the price we pay for a vehicle, including auction, towing and storage fees, as well as expenditures for buying and dismantling vehicles.

Inventory carrying value is determined using the average cost to sales percentage at each of our facilities and applying that percentage to the facility's inventory at expected selling prices, the assessment of which incorporates the sales probability based

on a part's days in stock and historical demand.

The average cost to sales percentage is derived from each facility's historical profitability for salvage vehicles.

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Lease Accounting

On January 1, 2019, we adopted Accounting Standards Update 2016-02, "Leases" ("ASU 2016-02"), which represents the FASB Accounting Standards Codification Topic 842 ("ASC 842").

We adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application with no restatement of comparative periods.

The most significant impact was the recognition of lease assets and liabilities for operating leases.

Refer to “Recent Accounting Pronouncements–Adoption of New Lease Standard” in Note 4, "Summary of Significant Accounting Policies ” and Note 13, "Leases ” to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding the adoption of the new lease standard and our critical accounting policies related to leases.

For information regarding our critical accounting policies related to leases, refer to Note 13, "Leases," to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

Business Combinations

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There are inherent assumptions and estimates used in developing the future cash flows and fair values of tangible and intangible assets, such as projecting revenues and profits, discount rates, income tax rates, royalty rates, customer attrition rates and other various valuation assumptions.

We use various valuation methods to value property, plant and equipment.

We use various valuation

methods to value property, plant and equipment.

When valuing real property, we typically use the sales comparison approach for land and the income approach for buildings and building improvements.

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Goodwill and Indefinite-Lived Intangibles Impairment

We are required to test our goodwill and indefinite-lived intangible assets for impairment at least annually.

We are required to test goodwill and indefinite-lived intangible assets for impairment at least annually and between annual tests whenever events indicate that an impairment may exist.

When testing goodwill for impairment, we are required to evaluate events and circumstances that may affect the performance of the reporting unit and the extent to which the events and circumstances may impact the future cash flows of the reporting unit to determine whether the fair value of the assets exceeds the carrying value.

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We perform goodwill impairment tests annually in the fourth quarter and between annual tests whenever events indicate that an impairment may exist.

During 2019 , we did not identify any events or changes in circumstances that would more likely than not reduce the fair value of our reporting units below their carrying amounts.

Therefore, we did not perform any impairment tests other than our annual test in the fourth quarter as of October 31, 2019 .

Our goodwill impairment assessment is performed by reporting unit.

LKQ’s market capitalization declined by approximately 40% 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, which did not result in a goodwill impairment.

We did not perform an impairment test in the second or third quarters of 2020.

Our goodwill impairment assessment is performed at the reporting unit level.

A reporting unit is an operating segment, or a business one level below an operating segment (the "component" level), for which discrete financial information is prepared and regularly reviewed by segment management.

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Wholesale – North America, Europe, Specialty and Self Service.

Each of these operating segments consists of multiple components that have discrete financial information available that is reviewed by

segment management on a regular basis.

We have evaluated these components and concluded that the components that compose the Wholesale – North America, Europe, Specialty, and Self Service operating segments are economically similar and thus were aggregated into four separate reporting units for our 2019 annual goodwill impairment test.

Each of these operating segments consists of multiple components that have discrete financial information available that is reviewed by segment management on a regular basis.

We have evaluated these components and concluded that the components that compose each of the Wholesale – North America, Europe, Specialty, and Self Service operating segments are economically similar and thus were aggregated into those four separate reporting units for our interim goodwill impairment test in the first quarter of 2020 and annual goodwill impairment test.

Our goodwill would be considered impaired if the carrying value of a reporting unit exceeded its estimated fair value.

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Discount rates, growth rates and cash flow projections are the assumptions that are most sensitive and susceptible to change as they require significant management judgment.

Impairment may result from, among other things, deterioration in the performance of acquired businesses, increases in our cost of capital, adverse market conditions, and adverse changes in applicable laws or regulations, including modifications that restrict the activities of the acquired business.

To assess the reasonableness of the fair value estimates, we compare the sum of the reporting units’ fair values to the Company’s market capitalization and calculate an implied control premium, which is then evaluated against recent market transactions in our industry.

Impairment may result from, among other things, deterioration in the performance of our reporting units' businesses, increases in our cost of capital, adverse market conditions, and adverse changes in applicable laws or regulations, including modifications that restrict the activities of our reporting units' businesses.

If we were required to recognize goodwill impairments, we would report those impairment losses as part of our operating results.

We determined no impairments existed when we performed our annual goodwill impairment testing in 2019 on all four reporting units as each of those reporting units had a fair value estimate that exceeded the carrying value by at least 25%.

We determined no impairments existed on any of our four reporting units when we performed our interim goodwill impairment testing in the first quarter of 2020, as each of those 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 or third quarter that necessitated an interim test of goodwill impairment.

We determined no impairments existed when we performed our annual goodwill impairment testing in the fourth quarter of 2020 on all four reporting units as each of those reporting units had a fair value estimate that exceeded the carrying value by at least 30%.

As of December 31, 2020, we had a total of $4.6 billion in goodwill subject to future impairment tests.

Based on our annual goodwill impairment test in the fourth quarter of 2018, we determined the carrying value of our Aviation reporting unit exceeded the fair value estimate by more than the carrying value, thus we recorded an impairment charge of $33 million, which represented the total carrying value of goodwill in our Aviation reporting unit.

The impairment charge was due to a decrease in the fair value estimate from the prior year fair value estimate, primarily driven by a significant deterioration in the outlook for the Aviation reporting unit due to competition, customer financial issues and changing market conditions for the airplane platforms that the business services, which lowered our projected gross margin and related future cash flows.

We reported the impairment charge in Impairment of net assets held for sale and goodwill on the Consolidated Statements of Income for the year ended December 31, 2018.

We sold the Aviation business in the third quarter of 2019.

We review indefinite-lived intangible assets for impairment annually or sooner if events or changes in circumstances indicate that the carrying value may not be recoverable.

We performed a quantitative impairment test in the fourth quarter as of October 31, 2019 , using the relief-from-royalty method to value the Warn trademark, which is our only indefinite-lived intangible;

w e determined no impairment existed as the trademark had a fair value estimate which exceeded the carrying value.

We review indefinite-lived intangible assets for impairment annually or on an interim basis if events or changes in circumstances indicate that the carrying value may not be recoverable.

In the first quarter of 2020, we determined that the effect of the uncertainty relating to the COVID-19 pandemic on our forecasted results represented a change in circumstances indicating that the carrying value of the Warn trademark, which is our only indefinite-lived intangible asset, might not be recoverable.

As a result, we performed a quantitative impairment test as of March 31, 2020 using the relief-from-royalty method and determined no impairment existed, as the trademark had a fair value estimate which exceeded the carrying value by approximately 9%.

We did not identify a triggering event in the second or third quarter that necessitated an interim test of impairment.

We performed a quantitative impairment test in the fourth quarter as of October 31, 2020, using the relief-from-royalty method to value the Warn trademark;

we determined no impairment existed at that time as the trademark had a fair value estimate which exceeded the carrying value by approximately 13%.

Recently Issued Accounting Pronouncements

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We have undertaken the 1 LKQ Europe program to create structural centralization and standardization of key functions to facilitate the operation of the Europe segment as a single business.

Under this multi-year program, we have recognized to date and expect to continue to recognize the following:

Under this multi-year program, we expect to recognize the following:

• Restructuring expenses — Non-recurring costs resulting directly from the implementation of the 1 LKQ Europe program from which the business will derive no ongoing benefit.

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• Transformation capital expenditures — Capitalizable costs for long-lived assets, such as software and facilities, that directly relate to the execution of the 1 LKQ Europe program.

Costs related to the 1 LKQ Europe program incurred to date are reflected in Selling, general and administrative expenses and Purchases of property, plant and equipment in our consolidated financial statements in Part II, Item 8 of this

Annual Report on Form 10-K.

We expect that future costs of the program, reflecting all three categories noted above, will range between $100 million and $125 million for the period from 2020 through 2021 with an additional $80 million to $100 million between 2022 and the projected completion date of the project in 2024.

Beginning in the second half of March 2020, management delayed certain projects under the 1 LKQ Europe program to reduce expenses and preserve capital 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.

While certain projects were delayed as a result of the COVID-19 pandemic, such as our procurement initiatives and the new headquarters in Switzerland, we also accelerated certain projects, such as the integration of previously acquired networks and sharing resources across LKQ Europe.

We have continued the project on schedule during the second wave of COVID-19.

We are targeting to complete the organizational design and implementation projects by the middle of 2021, with the remaining projects scheduled to be completed by 2024.

During the year ended December 31, 2020, we incurred $38 million in costs across all three categories noted above.

We expect that costs of the program, reflecting all three categories noted above, will range between $60 million and $80 million in 2021 with an additional $80 million to $100 million between 2022 and the projected program completion date in 2024.

In the future, we may also identify additional initiatives and projects under the 1 LKQ Europe program that may result in additional expenditures, although we are currently unable to estimate the range of charges for such potential future initiatives and projects.

We expect the transformation and restructuring expenses will be entirely funded by the improved trade working capital initiatives across our Europe segment.

COVID-19 Impact on Our Operations

In late February 2020, the Italian government began placing restrictions on activity as a result of the COVID-19 outbreak.

Sales volumes fell as fewer cars were on the road and less maintenance activity was performed.

While our Italian operation is an important part of our European business, it represented approximately 10% of the segment’s revenue in 2019, and thus the disruption did not have a material impact on the Company.

By mid-March, the COVID-19 impact began spreading across the rest of the geographies where we operate at a very rapid pace.

Governments adopted aggressive restrictions on the operation of non-essential businesses and personal movement, which reduced miles driven and collisions.

While our businesses have been deemed essential in most jurisdictions in which we operate, the change in behavior driven by the COVID-19 restrictions negatively impacted our sales volume.

Our organic parts and services revenue declined by 16.8%, 4.5%, and 5.2% in the second, third, and fourth quarters of 2020, respectively, relative to the comparable prior periods.

We showed improvement in the third quarter of 2020 as governments gradually lifted restrictions for non-essential businesses and personal movement, however, in the fourth quarter of 2020 revenue declined as certain jurisdictions put restrictions back into place.

As anticipated, April experienced the most negative revenue impact, with organic parts and services revenue (on a per day basis) down 30.3% compared to the prior year period.

As movement restrictions lessened in May and June, we experienced organic parts and services revenue declines (on a per day basis) of 13.2% and 7.3%, respectively, compared to the prior year periods.

However, the pace of improvement flattened into the third quarter as the increasing level of COVID-19 cases, especially in the United States, slowed the recovery.

During the third quarter, organic parts and services revenue declined by 4.5% compared to the prior year period, a small improvement from the June decline of 7.3% (on a per day basis).

During the fourth quarter, organic parts and services revenue declined by 6.1% (on a per day basis) and gradually worsened during the quarter with a decline of 7.2% (on a per day basis) in December.

In the first quarter of 2021, we expect revenue to remain lower on a year over year basis as COVID-19 continues to impact economic activity in the U.S.

and Europe, as the pandemic did not begin meaningfully impacting our results until March 2020.

The level of the year over year decrease in revenue will depend on the extent of lockdown measures taken in response to an increase in the prevalence of the virus outbreak and the timing and effectiveness of the vaccination efforts.

We expect revenue to increase in the second quarter of 2021 off of a low base and a gradual recovery in the second half of 2021.

Recognizing the demand changes in the first quarter of 2020, we took action in all of our business units to reduce our cost structure.

These actions included, but were not limited to, employee furloughs and reductions in force, decreases in hours and overtime, lowering compensation for salaried employees, a hiring freeze, elimination of temporary labor, route consolidation, deferral of projects, and temporary branch closures.

In the second quarter, these cost actions contributed to a reduction of approximately 18% in quarterly selling, general and administrative expenses compared to our first quarter 2020 run rate.

We estimate that the cost actions generated a $10 million benefit in cost of goods sold compared to our second quarter of 2019.

Some of the savings from the cost actions were delayed as we paid out vacation balances in April and covered medical benefits for employees in the United States during their furlough period.

During the third quarter and fourth quarters, we were able to sustain a portion of the cost benefits, with quarterly selling, general and administrative costs down approximately 10% for both periods compared to the first quarter 2020 run rate.

We estimate that the cost actions generated an approximately $15 million benefit in cost of goods sold for the second half of 2020 compared to the same period of 2019.

If revenue increases during 2021, we expect that some of the costs that were reduced as a result of COVID-19 will remain at a lower level;

the management team has been implementing productivity initiatives to create lower cost structures going forward as seen in the third and fourth quarter results.

We pursued certain financial assistance and relief programs that were available to us from governments in Europe and Canada, primarily in the form of grants to offset personnel expenses;

through December 31, 2020, we qualified for $52 million of assistance, although that figure was heavily weighted to the second quarter.

We currently do not anticipate qualifying for significant additional assistance in 2021, but we still will receive some government assistance in England.

This view may change in the future based on developments with the resurgence of the virus outbreak.

These cost actions lagged the revenue impact in the first and second quarters, which meant there was a negative timing impact of COVID-19 on our profitability in those periods in addition to the negative effect from reduced revenue.

By the third quarter, the cost actions were aligned with the revenue changes, and we generated higher Segment EBITDA dollars and margins than in the third quarter of 2019.

In the fourth quarter, selling, general and administrative ("SG&A") costs remained consistent with the third quarter and profitability remained higher than the prior year.

We also emphasized the preservation of capital with a deferral of growth driven capital projects, reductions in inventory orders, more active monitoring of customer receivables and terms, income and value added tax payment deferrals (the majority of which were paid during the third quarter), and suspension of our share buyback program (which was reinstated during the fourth quarter).

This focus was successful as we improved our liquidity position at year-end by approximately $1.0 billion relative to March 31, 2020 while managing through the disruption caused by the pandemic.

In each quarter of 2020, we prepared forecasts of future revenues, profits and cash flows to use in multiple analyses, including the interim and annual goodwill impairment test, other impairment tests of long-lived assets, assessments of the

recoverability of inventory, determination of customer and supplier rebate balances, calculation of the annual effective tax rate and evaluations of the realizability of deferred tax assets.

Actual results have exceeded our initial forecast prepared in the first quarter of 2020 with a full year organic parts and service revenue decline of 8.2% on a per day basis, diluted earnings per share attributable to LKQ stockholders of $2.09 and operating cash flow of $1.4 billion.

We expect to face continued pressure on revenue with COVID-19 infection rates remaining at heightened levels in a number of our geographies, but we believe that consolidated profit margins in 2021 will remain above those realized during 2020 due to margin and overhead cost initiatives implemented in 2019 and 2020.

As the economic impact of the pandemic is dependent on variables that are difficult to project and in many cases are outside of our control, it is possible that the estimates underlying our analyses may change.

This is particularly the case as it appears that the prevalence of the virus outbreak fluctuates depending on various factors, including the level of economic and social activity in a region and progress in vaccination efforts.

One of our top priorities is the health and safety of our employees, customers and the communities in which we operate.

We are using all reasonable efforts to follow governmental instructions and safety guidelines with respect to the operations of our facilities.

We have implemented protocols across our business units to help ensure the health and safety of our employees, customers and communities including, but not limited to:

restricting access to and enhancing cleaning and disinfecting protocols at our facilities;

use of personal protective equipment;

adhering to social distancing guidelines;

instituting remote work arrangements for many of our employees;

and restricting travel.

See the Results of Operations and Liquidity sections for further detail on our year over year trends.

Key Performance Indicators

We believe that organic revenue growth, Segment EBITDA and free cash flow are key performance indicators for our business.

Segment EBITDA is our key measure of segment profit or loss reviewed by our chief operating decision maker.

Free cash flow is a financial measure that is not prepared in accordance with U.S.

generally accepted accounting principles (“non-GAAP”).

• Organic revenue growth - We define organic revenue growth as total revenue growth from continuing operations excluding the effects of acquisitions and divestitures (i.e., revenue generated from the date of acquisition to the first anniversary of that acquisition, net of reduced revenue due to the disposal of businesses) and foreign currency movements (i.e., impact of translating revenue at prior period exchange rates).

Organic revenue growth includes incremental sales from both existing and new (i.e., opened within the last twelve months) locations and is derived from expanding business with existing customers, securing new customers and offering additional products and services.

We believe that organic revenue growth is a key performance indicator as this statistic measures our ability to serve and grow our customer base successfully.

• Segment EBITDA - Refer to Note 16, "Segment and Geographic Information,” in Part II, Item 8 of this Form 10-K for a description of the calculation of Segment EBITDA.

We believe that Segment EBITDA provides useful information to evaluate our segment profitability by focusing on the indicators of ongoing operational results.

• Free Cash Flow - We calculate free cash flow as net cash provided by operating activities, less purchases of property, plant and equipment.

Free cash flow provides insight into our liquidity and provides useful information to management and investors concerning cash flow available to meet our future debt service obligations and working capital requirements, to make strategic acquisitions and to repurchase our stock.

These three key performance indicators are used as targets in determining incentive compensation at various levels of the organization, including senior management.

By using these performance measures, we attempt to motivate a balanced approach to the business that rewards growth, profitability and cash flow generation in a manner that enhances our long-term prospects.

Results of Operations—Consolidated

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Year Ended December 31,

Revenue 100.0 % 100.0 %

Cost of goods sold 60.5 % 61.2 %

Gross margin 39.5 % 38.8 %

Selling, general and administrative expenses 28.1 % 28.6 %

Restructuring and acquisition related expenses 0.6 % 0.3 %

Impairment of net assets held for sale and goodwill

Loss on disposal of businesses and impairment of net assets held for sale

Depreciation and amortization 2.3 % 2.3 %

Operating income 8.5 % 7.2 %

Other expense, net

Total other expense, net 0.9 % 0.8 %

Income from continuing operations before provision for income taxes 7.6 % 6.3 %

Provision for income taxes 2.1 % 1.7 %

Equity in (losses) earnings of unconsolidated subsidiaries

Equity in earnings (losses) of unconsolidated subsidiaries 0.0 % (0.3) %

Income from continuing operations 5.5 % 4.3 %

Net income (loss) from discontinued operations

net income (loss) attributable to continuing noncontrolling interest

Net (loss) income from discontinued operations (0.0) % 0.0 %

Net income 5.5 % 4.4 %

net income attributable to continuing noncontrolling interest 0.0 % 0.0 %

net income attributable to discontinued noncontrolling interest 0.0 % 0.0 %

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The following table summarizes the changes in revenue by category (in thousands):

Year Ended December 31,

Percentage Change in Revenue

Foreign Exchange

Year Ended December 31, Percentage Change in Revenue

2020 2019 Organic Acquisition and Divestiture Foreign Exchange Total Change

Parts & services revenue $ 10,963,713 $ 11,877,846 (7.6) % (0.5) % 0.5 % (7.7) %

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In the table above, the sum of the individual percentages may not equal the total due to rounding.

The growth in parts and services revenue of 5.7% represented increases in segment revenue of 11.8% in Europe (driven by the Stahlgruber acquisition in May 2018) and 0.9% in North America and a decrease of 0.9% in Specialty.

The decrease in other revenue of 2.3% was primarily driven by a $21 million organic decrease, largely attributable to our North America segment.

The decline in parts and services revenue of 7.7% represented decreases in segment revenue of 13.3% in North America and 6.0% in Europe, partially offset by an increase of 3.1% in Specialty segment revenue.

Organic parts and services revenue declined by 7.6%, which included a 0.6% positive effect from approximately two additional selling days in the year ended December 31, 2020, resulting in a per day organic decline of 8.2%.

The decline in 2020 is primarily related to the impact of COVID-19 from March 2020 through December 2020 (refer to the "COVID-19 Impact on Our Operations" section above for further details).

The increase in other revenue of 5.9% was primarily driven by a $34 million organic increase, largely attributable to our North America segment.

Refer to the discussion of our segment results of operations for factors contributing to the change in revenue by segment during the year ended December 31, 2020 compared to the year ended December 31, 2019.

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Cost of goods sold decreased to 60.5% of revenue in the year ended December 31, 2020 from 61.2% of revenue in the year ended December 31, 2019.

Our North America segment generated a 0.6% improvement in gross margin, which was partially offset by (i) a 0.2% increase in cost of goods sold attributable to mix and (ii) an increase of 0.2% primarily due to inventory write-downs in our Europe segment.

The mix impact is a result of our Stahlgruber acquisition, as the lower margin Europe segment makes up a larger percentage of the consolidated results and has a dilutive effect on the gross

margin percentage.

We recorded a $21 million reduction of inventory primarily due to our Europe segment related to U.K.

branch consolidation and brand rationalization initiated as part of our restructuring program.

See Note 6, "Restructuring and Acquisition Related Expenses" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on our restructuring plans.

Refer to the discussion of our segment results of operations for factors contributing to the changes in cost of goods sold as a percentage of revenue by segment for the year ended December 31, 2019 compared to the year ended December 31, 2018 .

Cost of goods sold decreased 0.6% and 0.5% in our North America and Europe segments, respectively, partially offset by a 0.3% increase in cost of goods sold attributable to mix.

The mix impact was a result of the decreased volumes in our North America segment primarily due to the COVID-19 pandemic, as the higher margin North America segment made up a smaller percentage of the consolidated results, causing an unfavorable effect on the gross margin percentage.

For the year ended December 31, 2020, we recorded inventory write downs related to restructuring plans of $5 million and $3 million in our North America and Europe segments, respectively.

For the year ended December 31, 2019, we recorded inventory write downs of $21 million, principally due to our Europe segment related to U.K.

branch consolidation and brand rationalization initiated as part of our restructuring plans.

The lower inventory write downs in the year

ended December 31, 2020 compared to the prior year period resulted in a favorable impact on cost of goods sold of 0.1%.

Our restructuring plans are described in Note 6, "Restructuring and Acquisition Related Expenses" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

Refer t o the discussion of our segment results of operations for factors contributing to the changes in cost of goods sold as a percentage of revenue by segment for the year ended December 31, 2020 compared to the year ended December 31, 2019 .

Selling, General and Administrative Expenses.

Our selling, general and administrative ("SG&A") expenses as a percentage of revenue increased to 28.6% in the year ended December 31, 2019 from 28.2% in the year ended December 31, 2018 , primarily as a result of 0.3% and 0.2% increases from our North America and Europe segments, respectively.

Our SG&A expenses as a percentage of reven ue decreased to 28.1% in the year ended December 31, 2020 compared to 28.6% in the year ended December 31, 2019.

SG&A expenses decreased over the prior year period as a result of (i) a decrease of 0.5% in our North America segment and (ii) a 0.2% decrease in SG&A expenses attributable to mix, partially offset by (iii) an increase of 0.3% in our Europe segment.

The mix impact was a result of the decreased volumes in our North America segment primarily due to the COVID-19 pandemic, as the higher SG&A expense percentage for the North America segment made up a smaller percentage of the consolidated results, which had a favorable effect on the SG&A expense percentage.

Refer to the discussion of our segment results of operations for factors contributing to the changes in SG&A expenses as a percentage of revenue by segment for the year ended December 31, 2020 compared to the year ended December 31, 2019.

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Year Ended December 31,

2020 2019 Change

Restructuring expenses $ 58,204 (1)

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Total restructuring and acquisition related expenses $ 66,163 $ 36,979 $ 29,184

Restructuring expenses for the year ended December 31, 2019 primarily consisted of (i) $20 million related to our 2019 global restructuring program, and (ii) $14 million related to integration costs from acquisitions.

Restructuring expenses for the year ended December 31, 2018 primarily consisted of $10 million related to the integration of our acquisition of Andrew Page and $3 million related to our Specialty segment.

These integration activities included the closure of duplicate facilities and termination of employees.

Acquisition related expenses for the year ended December 31, 2019 included costs related to completed and pending acquisitions.

Acquisition related expenses for the year ended December 31, 2018 primarily consisted of $16 million of costs for our acquisition of Stahlgruber.

The remaining costs related to other completed acquisitions and acquisitions that were pending as of December 31, 2018 .

(1) Restructuring expenses for the year ended December 31, 2020 consisted of (i) $42 million related to our 2020 global restructuring program, (ii) $9 million related to integration costs from acquisitions, and (iii) $7 million related to our 2019 global restructuring program.

(2) Restructuring expenses for the year ended December 31, 2019 primarily consisted of $20 million related to our 2019 global restructuring program and $14 million related to integration costs from acquisitions.

(3) Acquisition related expenses for the year ended December 31, 2020 primarily consisted of an $8 million adjustment for the resolution of a purchase price matter related to the Stahlgruber transaction for an amount above our prior estimate.

(4) Acquisition related expenses for the year ended December 31, 2019 included costs primarily related to the acquisition of an immaterial wholesale business in Europe.

Impairment of Net Assets Held for Sale and Goodwill.

We recorded a $47 million impairment charge on net assets held for sale for the year ended December 31, 2019 .

The impairment charge was primarily attributable to our North America segment.

We recorded a $33 million goodwill impairment charge on the Aviation reporting unit in our North America segment in the fourth quarter of 2018.

See "Net Assets Held for Sale" and "Intangible Assets" in Note 4, "Summary of Significant Accounting Policies " to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on the impairment charges.

Loss on Disposal of Businesses and Impairment of Net Assets Held for Sale.

For the year ended December 31, 2020, we recorded a net loss on the disposal of businesses and impairment charges on net assets held for sale totaling $3 million, compared to $47 million of net impairment charges on net assets held for sale for the year ended December 31, 2019 primarily attributable to our North America segment.

See "Net Assets Held for Sale" in Note 4, "Summary of Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on the net loss on disposals and impairment charges.

Depreciation and Amortization .

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Year Ended December 31,

2020 2019 Change

Depreciation $ 153,027 $ 150,649 $ 2,378 (1)

Amortization 119,265 140,121 (20,856) (2)

Total depreciation and amortization $ 272,292 $ 290,770 $ (18,478)

Depreciation expense included an incremental $6 million in our Europe segment, principally due to (i) a $7 million increase in depreciation expense from our acquisition of Stahlgruber, and (ii) several individually immaterial factors that increased depreciation expense by $2 million in the aggregate, partially offset by (iii) a decrease of $3 million related to the impact of foreign currency translation, primarily due to decreases in the euro and pound sterling exchange rates during the year ended December 31, 2019 compared to the prior year period.

Depreciation expense

also included an incremental $6 million in our North America segment, primarily due to capital expenditures related to new warehouse openings and upgrades to our existing information technology infrastructure.

The increase in amortization expense primarily reflected (i) an incremental $16 million from our acquisition of Stahlgruber, partially offset by (ii) a decrease of $6 million related to the impact of foreign currency translation, principally due to a decrease in the euro exchange rate during the year ended December 31, 2019 compared to the prior year period, and (iii) a decrease of $6 million related to our 2016 acquisition of Rhiag, which had lower amortization expense during the year ended December 31, 2019 compared to the prior year period as a result of accelerated amortization on a customer relationship intangible asset.

(1) Depreciation expense incre ased by $2 million, primarily due to capital expenditures in our North America segment.

(2) The decrease in amortization expense primarily reflected decrea ses of $17 million and $6 million relate d to the customer relationship intangible assets recorded upon our acquisitions of Stahlgruber and Rhiag, respectively, as the

accelerated amortization of the customer relationship intangible assets resulted in lower amortization expense during the year ended December 31, 2020 compared to the prior year peri od.

Other Expense, Net.

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Other expense, net for the year ended December 31, 2019 $ 105,621

Decrease due to:

(Decrease) increase due to:

Interest expense (34,720) (1)

(Gain) loss on debt extinguishment

Interest income and other income, net

Loss/gain on debt extinguishment 12,879 (2)

Interest income and other expense (income), net 16,802 (3)

Net decrease (5,039)

Other expense, net for the year ended December 31, 2020 $ 100,582

The decrease in interest expense is primarily related to (i) a $9 million decrease from lower interest rates on borrowings under our senior secured credit agreement compared to the prior year period, and (ii) a $4 million decrease from foreign currency translation, primarily related to a decrease in the euro exchange rate during the year ended December 31, 2019 compared to the prior year period, partially offset by (iii) a $5 million increase resulting from higher outstanding debt during the year ended December 31, 2019 compared to the prior year period (including the borrowings in 2018 under our Euro Notes (2026/28) for the Stahlgruber acquisition).

The increase in interest income and other income, net primarily consisted of (i) a $12 million non-recurring gain related to resolution of an acquisition related matter in the fourth quarter of 2019, (ii) a $5 million fair value loss recorded during 2018 related to a preferential rights issue to subscribe for new shares at a discounted share price for our equity method investment in Mekonomen;

see Note 4, "Summary of Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information, (iii) $3 million of proceeds received in the first quarter of 2019 related to an insurance settlement in our North America segment, (iv) a $2 million non-recurring impairment loss recorded during the second quarter of 2018 related to our Andrew Page operation, and (v) several individually immaterial factors that increased interest and other income by $2 million in the aggregate.

(1) The decrease in interest is primarily related to (i) a $32 million decrease resulting from lower outstanding debt during the year ended December 31, 2020 compared to the prior year period, and (ii) a $4 million decrease from lower interest rates on borrowings under our senior secured credit agreement compared to the prior year period, partially offset by (iii) a $2 million increase from foreign currency translation, primarily related to an increase in the euro exchange rate during the year ended December 31, 2020 compared to the prior year period.

(2) In January 2020, we recorded a loss on debt extinguishment of $13 million related to the redemption of the U.S.

Notes (2023) due to the early-redemption premium and the write-off of the unamortized debt issuance costs.

(3) The decrease in interest income and other expense (income), net primarily consisted of (i) a $12 million non-recurring gain related to resolution of an acquisition related matter in the fourth quarter of 2019, (ii) pension settlement losses of $6 million related to our primary defined benefit plan in the U.S.

Plan") in 2020, and (iii) several individually immaterial factors that decreased interest income and other expense (income), net by $4 million in the aggregate in 2020, partially offset by (iv) a $6 million increase in insurance settlement proceeds compared to the prior year period, primarily due to our North America segment.

Provision for Income Taxes.

Our effective income tax rate for the year ended December 31, 2019 was 27.2%, compared to 25.7% for the prior year.

The increase was primarily attributable to the impact of a favorable discrete item of $10 million for the year ended December 31, 2018, reflecting an adjustment to the Tax Act transition tax.

We did not have a similar benefit in 2019, thus creating an increase of 1.4% on the annual tax rate.

The increase was also partially attributable to the impact of a favorable discrete item of approximately $5 million for the year ended December 31, 2018, for excess tax benefits from stock-based payments;

there were $3 million of excess tax benefits from stock-based payments for the year ended December 31, 2019 for an unfavorable year over year impact of 0.3%.

Our effective income tax rate for the year ended December 31, 2020 was 28.2%, compared to 27.2% for the comparable prior year period.

Primary factors in the increase include valuation allowances on the tax benefit of net operating losses in certain jurisdictions where realization is uncertain and shifts in the geographic blend of international earnings.

Net discrete items in both years were immaterial to the effective tax rate.

See Note 15, "Income Taxes" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.

Equity in (Losses) Earnings of Unconsolidated Subsidiaries.

Equity in (losses) earnings of unconsolidated subsidiaries for the year ended December 31, 2019 primarily related to our investment in Mekonomen.

During the years ended December 31, 2019 and 2018, we recognized other-than-temporary impairment charges of $40 million and $71 million, respectively, related to our investment in Mekonomen.

See "Investments in Unconsolidated Subsidiaries" in Note 4, "Summary of Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on the impairment charges.

Excluding the impairment charges, we recorded equity in earnings of $9 million and $7 million related to our investment in Mekonomen for the years ended December 31, 2019 and 2018, respectively.

Equity in Earnings (Losses) of Unconsolidated Subsidiaries.

Equity in earnings (losses) of unconsolidated subsidiaries for the year ended December 31, 2020 primarily related to our investment in Mekonomen.

During the first quarter of 2019, we recorded a $40 million other-than-temporary impairment related to our investment in Mekonomen.

There were no impairment charges for Mekonomen in 2020.

Foreign Currency Impact.

We translate our statements of income at the average exchange rates in effect for the period.

Relative to the rates used during the year ended December 31, 2018 , the Czech koruna, euro, pound sterling and Canadian dollar rates used to translate the 2019 statements of income decreased by 5%, 5%, 4% and 2%, respectively.

The negative translation effect of the change in foreign currencies against the U.S.

dollar combined with the negative impact of realized and

unrealized currency gains and losses for the year ended December 31, 2019 resulted in a $0.03 negative effect on diluted earnings per share relative to the prior year period.

Net Income (Loss) from Discontinued Operations.

We recorded net income of $2 million and a net loss of $4 million from discontinued operations during the years ended December 31, 2019 and 2018, respectively.

See Note 3, "Discontinued Operations" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.

Net (Loss) Income Attributable to Continuing and Discontinued Noncontrolling Interest.

Net (loss) income attributable to continuing noncontrolling interest for the year ended December 31, 2019 was comparable to the prior year period, due to (i) a $2 million decrease in our North America segment, as we allocated a loss of $1 million to the noncontrolling interest of an immaterial subsidiary during the year ended December 31, 2019, which was offset by (ii) a $2 million increase related to the noncontrolling interest of subsidiaries acquired in connection with the Stahlgruber acquisition.

Net income attributable to discontinued noncontrolling interest was $1 million for the year ended December 31, 2019 and related to the Stahlgruber Czech Republic wholesale business.

Relative to the rates used during the year ended December 31, 2019, the euro and pound sterling rates used to translate the 2020 statements of income increased by 2.0% and 0.6%, respectively, and the year to date average rates for the Canadian dollar and Czech koruna decreased by 1.0% and 0.9%, respectively.

The unfavorable impact of realized and unrealized currency gains and losses for the year ended December 31, 2020 resulted in a $0.01 negative effect on d iluted earnings per share relative to the prior year.

Net Income Attributable to Continuing and Discontinued Noncontrolling Interest.

Net income attributable to continuing noncontrolling interest for the year ended December 31, 2020 decreased $1 million compared to the year ended December 31, 2019 primarily due to the noncontrolling interest of subsidiaries acquired in connection with the Stahlgruber acquisition.

Net income attributable to discontinued noncontrolling interest was immaterial and $1 million for the years ended December 31, 2020 and 2019, respectively, and related to the Stahlgruber Czech Republic wholesale business.

See Note 3, "Discontinued Operations" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on this business.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

The following table summarizes the changes in revenue by category (in thousands):

Year Ended December 31,

Percentage Change in Revenue

Foreign Exchange

Parts & services revenue

Other revenue

Total revenue

In the table above, the sum of the individual percentages may not equal the total due to rounding.

The change in parts and services revenue of 22.0% represented increases in segment revenue of 6.5% in North America, 43.4% in Europe and 13.2% in Specialty.

Organic growth in parts and services revenue on a per day basis was 4.1% as there was one additional selling day in 2018 compared to 2017.

The increase in other revenue of 21.8% was primarily driven by a $108 million organic increase, largely attributable to our North America segment.

Refer to the discussion of our segment results of operations for factors contributing to the change in revenue by segment during the year ended December 31, 2018 compared to the year ended December 31, 2017 .

Cost of Goods Sold .

Cost of goods sold increased to 61.5% of revenue in the year ended December 31, 2018 from 61.0% of revenue in the year ended December 31, 2017 .

Cost of goods sold increased 0.4% and 0.3% as a result of our Europe and North America segments, respectively.

Selling, General and Administrative Expenses.

Our SG&A expenses as a percentage of revenue increased to 28.2% in the year ended December 31, 2018 from 27.9% in the year ended December 31, 2017 , primarily as a result of a 0.2% increase from our North America segment.

Restructuring and Acquisition Related Expenses .

The following table summarizes restructuring and acquisition related expenses for the periods indicated (in thousands):

Year Ended December 31,

Restructuring expenses

Acquisition related expenses

Total restructuring and acquisition related expenses

These integration activities included the closure of duplicate facilities and termination of employees.

Restructuring expenses for the year ended December 31, 2017 included $2 million, $2 million, and $1 million related to the integration of acquired businesses in our North America, Specialty, and Europe segments, respectively.

These integration activities included the closure of duplicate facilities and termination of employees.

Acquisition related expenses for the year ended December 31, 2018 primarily consisted of $16 million of costs for our acquisition of Stahlgruber.

The remaining costs related to other completed acquisitions and acquisitions that were pending as of December 31, 2018 .

Acquisition related expenses for the year ended December 31, 2017 included $5 million of costs for our acquisition of Andrew Page, primarily related to legal and other professional fees associated with the CMA review.

The remaining acquisition related costs for the year ended December 31, 2017 consisted of external costs for completed acquisitions;

pending acquisitions as of December 31, 2017 , including $4 million related to Stahlgruber;

and potential acquisitions that were terminated.

See Note 6, "Restructuring and Acquisition Related Expenses " to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on our restructuring and integration plans.

Impairment of Net Assets Held for Sale and Goodwill.

We recorded a $33 million goodwill impairment charge on the Aviation reporting unit in the fourth quarter of 2018.

See "Intangible Assets" in Note 4, "Summary of Significant Accounting Policies ," for further information.

Depreciation and Amortization .

The following table summarizes depreciation and amortization for the periods indicated (in thousands):

Year Ended December 31,

Total depreciation and amortization

The increase in depreciation expense primarily reflected an increase of $17 million in our Europe segment, composed of (i) $10 million of incremental depreciation expense from our acquisition of Stahlgruber, (ii) a $3 million increase due to a measurement period adjustment recorded in the year ended December 31, 2017 related to our valuation procedures for our acquisition of Rhiag that reduced depreciation expense, and (iii) $3 million of incremental depreciation expense from our acquisitions of aftermarket parts distribution businesses in Belgium and Poland in the third quarter of 2017.

Depreciation expense also increased by $2 million related to the impact of foreign currency translation, primarily due to increases in the pound sterling, euro, and Czech koruna exchange rates during 2018 compared to the prior year.

The increase in amortization expense primarily reflected (i) an increase of $37 million from our acquisition of Stahlgruber, and (ii) an increase of $4 million from our acquisition of Warn, partially offset by (iii) a $7 million decrease due to our 2016 acquisitions of Rhiag and PGW, which had higher amortization expense in 2017 compared to 2018 as a result of accelerated amortization on the customer relationship intangible assets.

Other Expense, Net.

The following table summarizes the components of the year-over-year increase in other expense, net (in thousands):

Other expense, net for the year ended December 31, 2017

Increase due to:

Interest expense

Loss on debt extinguishment

Gains on bargain purchases

Interest income and other income, net

Other expense, net for the year ended December 31, 2018

Additional interest primarily related to (i) a $38 million increase resulting from higher outstanding debt during 2018 compared to the prior year (including the borrowings under our Euro Notes (2026/28)), (ii) a $5 million increase from higher interest rates on borrowings under our senior secured credit agreement compared to the prior year, and (iii) a $2

million increase from foreign currency translation, primarily related to an increase in the euro exchange rate during the year ended December 31, 2018 compared to the year ended December 31, 2017 .

Over the past three years, we have completed several European acquisitions that resulted in gains on bargain purchase.

In 2018, newly recorded gains and adjustments related to preliminary gains decreased relative to the prior year amount.

The increase in interest income and other income, net primarily consisted of (i) a $6 million increase in foreign currency losses, (ii) a $5 million fair value loss recorded during 2018 related to a preferential rights issue to subscribe for new shares at a discounted share price for our equity method investment in Mekonomen;

see Note 4, "Summary of Significant Accounting Policies " to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information, and (iii) a non-recurring $4 million gain recorded in 2017 due to a decrease in the fair value of contingent consideration liabilities.

Provision for Income Taxes .

Our effective income tax rate was 25.7% for the year ended December 31, 2018 , compared to 30.7% for the year ended December 31, 2017 .

The following table summarizes the components of our provision for income taxes for the periods indicated (in thousands):

Year Ended December 31,

Base provision for income taxes

Excess tax benefits from stock-based payments

tax reform deferred tax rate adjustment

tax reform transition tax on foreign earnings

Other discrete items

Provision for income taxes

Excluding the impact of discrete items, prior to the enactment of the Tax Act our recurring annual effective tax rate was approximately 35%.

Largely due to the reduction in the U.S.

federal tax rate to 21%, we estimated the rate to be approximately 27%.

Represents a discrete item for excess tax benefits received upon the exercise of stock options or vesting of RSUs.

The 2017 amount represented the provisional estimate of the revaluation of deferred tax assets and liabilities as a result of the Tax Act which reduced the U.S.

federal corporate tax rate.

There were no adjustments to the revaluation recorded in 2018;

the accounting for this item is complete.

The 2017 amount represented the provisional estimate of the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017 as a result of the Tax Act.

In 2018, we recognized a $10 million favorable adjustment to the Tax Act transition tax provisional estimate;

the accounting for this item is complete.

For further discussion of the Tax Act, see Note 15, "Income Taxes," included in Part II, Item 8 of this Annual Report on Form 10-K.

Equity in (Losses) Earnings of Unconsolidated Subsidiaries.

Equity in (losses) earnings of unconsolidated subsidiaries for the years ended December 31, 2018 and 2017 primarily related to our investment in Mekonomen.

During the year ended December 31, 2018 , we recorded $71 million in other-than-temporary impairments related to our investment in Mekonomen.

See Note 4, "Summary of Significant Accounting Policies " to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on the impairment charges.

The impairment charges are excluded from our calculation of Segment EBITDA.

See Note 16, "Segment and Geographic Information " to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for our reconciliation of Net Income to Segment EBITDA.

Excluding the impairment charges, we recorded equity in earnings of $7 million during each of the years ended December 31, 2018 and 2017 related to our investment in Mekonomen.

Foreign Currency Impact.

We translate our statements of income at the average exchange rates in effect for the period.

Relative to the rates used during the year ended December 31, 2017 , the Czech koruna, euro, and pound sterling rates used to translate the 2018 statements of income increased by 7%, 5%, and 4%, respectively.

The translation effect of the change in foreign currencies against the U.S.

dollar and realized and unrealized currency losses for the year ended December 31, 2018 resulted in a $0.02 positive effect on diluted earnings per share from continuing operations relative to the prior year.

Net Income (Loss) from Discontinued Operations.

We recorded net losses from discontinued operations of $4 million and $7 million during the years ended December 31, 2018 and 2017, respectively.

Discontinued operations represents the automotive glass manufacturing business of PGW, which we sold on March 1, 2017.

See Note 3, "Discontinued Operations" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.

Net (Loss) Income Attributable to Continuing and Discontinued Noncontrolling Interest.

Net (loss) income attributable to continuing noncontrolling interest for the year ended December 31, 2018 increased $7 million from 2017 due to (i) a $5 million increase in our North America segment, as we allocated a loss of $4 million to the noncontrolling interest of an immaterial subsidiary during the year ended December 31, 2017, and (ii) a $2 million increase related to the noncontrolling interest of subsidiaries acquired in connection with the Stahlgruber acquisition.

Results of Operations—Segment Reporting

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Year Ended December 31,

% of Total Segment Revenue

2020 % of Total Segment Revenue 2019 % of Total Segment Revenue

Third Party Revenue

North America $ 4,631,306 $ 5,208,589

Europe 5,492,184 5,838,124

Specialty 1,505,340 1,459,396

Total third party revenue $ 11,628,830 $ 12,506,109

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North America $ 4,632,339 $ 5,209,294

Europe 5,492,184 5,838,124

Specialty 1,508,995 1,464,042

Eliminations (4,688) (5,351)

Total revenue $ 11,628,830 $ 12,506,109

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North America $ 778,504 16.8 % $ 712,957 13.7 %

The key measure of segment profit or loss reviewed by our chief operating decision maker, who is our Chief Executive Officer, is Segment EBITDA.

Europe 427,582 7.8 % 454,220 7.8 %

Specialty 162,673 10.8 % 161,184 11.0 %

The key measure of segment profit or loss reviewed by our chief operating decision maker, our Chief Executive Officer, is Segment EBITDA.

We use Segment EBITDA to compare profitability among our segments and evaluate business strategies.

Segment EBITDA includes revenue and expenses that are controllable by the segment.

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.

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 attributable to LKQ stockholders excluding discontinued operations and discontinued noncontrolling interest, depreciation, amortization, interest (which includes gains and losses on debt extinguishment) and income tax expense.

See Note 16, "Segment and Geographic Information" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for a reconciliation of total Segment EBITDA to net income.

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The following table summarizes the changes in third party revenue by category in our North America segment (in thousands):

Year Ended December 31,

Percentage Change in Revenue

North America

Acquisition (3)

Foreign Exchange

Parts & services revenue

Other revenue

Total third party revenue

In the table above, the sum of the individual percentages may not equal the total due to rounding.

Parts and services organic revenue increased 0.9% for the year ended December 31, 2019 compared to the prior year period.

This relatively low growth rate was impacted by (i) lower revenue in our glass and aviation businesses, which had unfavorable effects on organic growth of 0.4% and 0.2%, respectively, and (ii) collision and liability related auto claims being 1.4% lower for the year ended December 31, 2019 compared to the prior year period, which adversely impacted volume in our wholesale operations.

Additionally, our North America segment generated a 5.7% organic growth rate for parts and services revenue in the year ended December 31, 2018, due in part to severe winter weather conditions.

Facing a strong comparable period and with less favorable weather conditions in 2019, organic parts and services revenue growth was below our historical average.

The $21 million year over year organic decrease in other revenue primarily related to (i) a $67 million decrease in revenue from scrap steel and other metals primarily related to lower prices, partially offset by increased volumes, and (ii) a $12 million decrease in core revenue primarily related to decreased volumes, partially offset by (iii) a $62 million increase in revenue from precious metals (platinum, palladium and rhodium) primarily due to higher prices.

Acquisition related growth in 2019 reflected revenue from our acquisitions of seven wholesale businesses and one self service business from the beginning of 2018 through the one-year anniversary of the acquisitions, partially offset by the disposal of our aviation business in the third quarter of 2019.

Segment EBITDA .

Segment EBITDA increased $53 million, or 8.0%, for the year ended December 31, 2019 compared to the prior year period.

Sequential decreases in scrap steel prices in our salvage and self service operations had an unfavorable impact of $23 million on North America Segment EBITDA for the year ended December 31, 2019 , compared to a $5 million favorable impact for the year ended December 31, 2018 .

This unfavorable impact resulted from the decrease in scrap steel prices between the date we purchased a vehicle, which influences the price we pay for a vehicle, and the date we scrapped a vehicle, which influences the price we receive for scrapping a vehicle.

The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our North America segment:

North America

Percentage of Total Segment Revenue

Segment EBITDA for the year ended December 31, 2018

Increase (decrease) due to:

Change in gross margin

Change in segment operating expenses

Change in other expense, net and net income attributable to continuing noncontrolling interest

Segment EBITDA for the year ended December 31, 2019

In the table above, the sum of the individual percentages may not equal the total due to rounding.

The increase in gross margin primarily reflected favorable impacts of 1.3% from our wholesale operations and 0.3% from the disposal of our aviation business in the third quarter of 2019, partially offset by several individually immaterial factors that had an unfavorable impact of 0.3% in the aggregate.

The increase in wholesale gross margin was primarily attributable to ongoing margin improvement initiatives and, to a lesser extent, the favorable impact from higher prices of precious metals (platinum, palladium and rhodium) compared to the prior year period.

The increase in segment operating expenses as a percentage of revenue is primarily related to a 0.4% increase in facility expenses principally due to higher expenses in rent related to expansions and renewals.

The decrease in other expense, net and net income attributable to continuing noncontrolling interest was due to several individually immaterial factors that had a favorable impact of 0.2% in the aggregate.

Third Party Revenue .

The following table summarizes the changes in third party revenue by category in our Europe segment (in thousands):

Year Ended December 31,

Percentage Change in Revenue

Acquisition (2)

Foreign Exchange (3)

Parts & services revenue

Other revenue

Total third party revenue

In the table above, the sum of the individual percentages may not equal the total due to rounding.

Parts and services organic revenue increased for the year ended December 31, 2019 , mainly driven by our Eastern European and U.K.

operations, which had low single-digit growth rates.

Softer economic conditions across the continent continued to have a negative impact on revenue growth, most notably in Germany and Italy.

Acquisition related growth for the year ended December 31, 2019 was $850 million , or 16.3% , primarily from our acquisition of Stahlgruber.

Compared to the prior year, exchange rates decreased our revenue growth by $240 million , or 4.6% , primarily due to the stronger U.S.

dollar against the euro, pound sterling and Czech koruna for the year ended December 31, 2019 compared to the prior year period.

Segment EBITDA .

Segment EBITDA increased $31 million , or 7.5% , for the year ended December 31, 2019 compared to the prior year period.

Our Europe Segment EBITDA included a negative year over year impact of $21 million related to the translation of local currency results into U.S.

dollars at lower exchange rates than those experienced during the year ended December 31, 2018 .

On a constant currency basis (i.e.

excluding the translation impact), Segment EBITDA increased by $53 million , or 12.4% , compared to the prior year.

Refer to the Foreign Currency Impact discussion within the Results of Operations–Consolidated section above for further detail regarding foreign currency impact on our results for the year ended December 31, 2019 .

The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Europe segment:

Percentage of Total Segment Revenue

Segment EBITDA for the year ended December 31, 2018

Increase (decrease) due to:

Change in gross margin

Change in segment operating expenses

Segment EBITDA for the year ended December 31, 2019

In the table above, the sum of the individual percentages may not equal the total due to rounding.

Gross margin increased primarily due to (i) a 0.4% favorable impact related to an increase in supplier rebates as a result of centralized procurement for our Europe segment and (ii) a 0.3% increase in our U.K.

operations primarily as a result of decreased costs related to the national distribution facility, primarily due to expenses related to temporary service issues in 2018 that did not reoccur in 2019, as well as decreased inventory reserves, partially offset by (iii) a 0.3% unfavorable impact related to our Benelux and Italy operations, principally due to higher inventory write-offs and lower prices, and (iv) several individually immaterial factors that had an unfavorable impact of 0.2% in the aggregate.

(2) The increase in segment operating expenses was primarily due to (i) a 0.4% increase in personnel expenses principally as a result of the negative leverage effect and wage inflation due to low unemployment partially offset by a decrease from other personnel-related costs, including salaries and wages and non-incentive benefits, primarily due to reduced headcount, and (ii) a 0.2% increase in transformation expenses related to the 1 LKQ Europe program.

Third Party Revenue .

The following table summarizes the changes in third party revenue by category in our Specialty segment (in thousands):

Year Ended December 31,

Percentage Change in Revenue

Foreign Exchange

Parts & services revenue

Other revenue

Total third party revenue

In the table above, the sum of the individual percentages may not equal the total due to rounding.

The organic decline in parts and services revenue was driven by lower year over year wholesale drop ship sales largely due to supplier policy changes restricting our ability to sell to certain online retailers;

as well as decreased sales volumes in our Canada operations compared to the prior year period, primarily due to softening economic conditions.

This organic decline was partially offset by modest growth in both our automotive and RV businesses in the U.S., largely due to expansion of our product line coverage, strong exclusive line performance, and continued roll-out of new product applications for new model year vehicles.

Segment EBITDA .

Segment EBITDA decreased $7 million , or 4.4% , for the year ended December 31, 2019 compared to the prior year period.

The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Specialty segment:

Percentage of Total Segment Revenue

Segment EBITDA for the year ended December 31, 2018

(Decrease) increase due to:

Change in gross margin

Change in segment operating expenses

Change in other expense, net

Segment EBITDA for the year ended December 31, 2019

In the table above, the sum of the individual percentages may not equal the total due to rounding.

The decrease in gross margin reflects unfavorable impacts of (i) 0.4% of higher product costs, primarily due to non-recurring benefits from supplier discounts resulting from strategic purchasing efforts in the fourth quarter of 2017, which had a favorable impact on the year ended December 31, 2018 as they were recognized over a turn of inventory, (ii) 0.4% due to unfavorable product mix in 2019, and (iii) several individually immaterial factors that had an unfavorable impact of 0.4% in the aggregate.

The decrease in segment operating expenses reflects favorable impacts of (i) 0.5% in personnel costs primarily due to reduced headcount and (ii) 0.3% in freight expenses due to a decreased use of third party freight, partially offset by (iii) several individually immaterial factors that had an unfavorable impact of 0.2% in the aggregate.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

North America

Third Party Revenue .

The following table summarizes the changes in third party revenue by category in our North America segment (in thousands):

Year Ended December 31,

Percentage Change in Revenue

North America

Acquisition (3)

Foreign Exchange

Year Ended December 31, Percentage Change in Revenue

North America 2020 2019 Organic Acquisition and Divestiture (3)

Foreign Exchange Total Change

Parts & services revenue $ 3,988,214 $ 4,600,903 (12.9) % (1)

(0.3) % (0.1) % (13.3) %

Other revenue 643,092 607,686 5.5 % (2)

0.4 % (0.0) % 5.8 %

Total third party revenue $ 4,631,306 $ 5,208,589 (10.8) % (0.2) % (0.1) % (11.1) %

In the table above, the sum of the individual percentages may not equal the total due to rounding.

Organic growth in parts and services revenue was attributable to roughly equal impacts of favorable pricing and increased sales volumes in our wholesale operations.

The volume increases were primarily driven by (i) incremental sales related to an agreement signed in December 2017 for the distribution of batteries, and (ii) to a lesser extent, severe winter weather conditions in the first quarter of 2018 compared to mild winter weather conditions in the prior year period.

Organic growth in parts and services revenue for our North America segment on a per day basis was 5.3% as there was one additional selling day in 2018 compared to 2017.

The $103 million increase in other revenue primarily related to (i) a $64 million increase in revenue from scrap steel and other metals primarily related to higher prices and, to a lesser extent, increased volumes, year over year, (ii) a $24 million increase in revenue from metals found in catalytic converters (platinum, palladium, and rhodium) primarily due to higher prices and, to a lesser extent, increased volumes, year over year, and (iii) a $7 million increase in core revenue primarily related to increased volumes year over year.

Acquisition related growth in 2018 reflected revenue from our acquisition of ten wholesale businesses from the beginning of 2017 up to the one-year anniversary of the acquisition dates.

(1) Parts and services organic revenue declined despite one additional selling day in the year ended December 31, 2020 compared to the prior year period.

On a per day basis, organic revenue declined 13.3%.

The organic decline was impacted by collision and liability repairable auto claims, which, according to data from CCC, were 26.0% lower for the year ended December 31, 2020 compared to the prior year period.

This decrease in claims activity was primarily due to the COVID-19 pandemic and had an adverse impact on sales volumes in our wholesale operations.

The volume decline in collision parts was partially offset by an outperformance of the claims trend attributable to share gains, mechanical part sales and self service parts sales and admissions.

Prior to the pandemic, parts and services organic revenue in North America was slightly less than the same period in the prior year, declining 1.1% through February 2020, principally due to (i) the termination in the fourth quarter of 2019 of an agreement signed in December 2017 for the distribution of batteries which had an unfavorable impact of 0.8% through February 2020 compared to the prior year period, and, (ii) to a lesser extent, milder winter weather conditions compared to the prior year period.

During the period of March 2020 through December 2020, parts and services organic revenue declined 15.6% on a per day basis compared to the prior year period primarily due to volume effects caused by the COVID-19 pandemic (collision and liability repairable auto claims were down approximately 41.7%, 24.4%, and 27.2% in the second, third, and fourth quarters of 2020, respectively, according to data from CCC).

Going into the first quarter of 2021, we anticipate downward pressures on aftermarket fill rates due to continued ocean freight delays, which in turn may adversely impact sales.

(2) The $33 million year over year organic increase in other revenue is primarily related to a $106 million increase in revenue from precious metals (platinum, palladium and rhodium) primarily due to higher prices compared to the prior year, partially offset by (i) a $46 million decrease in revenue from other scrap metals (e.g.

aluminum) and fluids due to lower volumes, (ii) an $18 million decrease in revenue from scrap steel due to lower prices and volumes, and (iii) a decrease in core revenue of $9 million due to lower volumes.

The volume declines in other revenue were due to lower purchase volumes and throughput in our salvage and self service operations as a result of the COVID-19 pandemic.

(3) Acquisition related growth for the year ended December 31, 2020 reflected revenue from our acquisition of three wholesale businesses and one self service business since the beginning of 2019 through the one-year anniversary of the acquisitions.

Reduced revenue as a result of the disposal of our aviation business in the third quarter of 2019 more than offset the acquisition growth during this period.

Segment EBITDA.

Segment EBITDA increased $5 million, or 0.7%, in 2018 compared to the prior year.

Sequential increases in scrap steel prices in our salvage and self service operations had a favorable impact of $5 million on North America Segment EBITDA during the year ended December 31, 2018 , compared to a $12 million positive impact on the year ended December 31, 2017 .

This favorable impact resulted from the increase in scrap steel prices between the date we purchased a vehicle, which influences the price we pay for a vehicle, and the date we scrapped a vehicle, which influences the price we receive for scrapping a vehicle.

Segment EBITDA increased $66 million, or 9.2%, in the year ended December 31, 2020, including the impact of one additional selling day compared to the prior year period.

The adverse impact of the COVID-19 pandemic on sales volumes in our wholesale operations had a significant unfavorable impact on Segment EBITDA.

This adverse impact was more than offset in part due to operational efficiency and rightsizing actions and higher revenue from precious metals.

Net sequential increases in scrap steel prices in our salvage and self service operations had a $16 million favorable impact on North America Segment EBITDA during the year ended December 31, 2020, compared to a $23 million unfavorable impact during the year ended December 31, 2019 resulting from net sequential decreases in scrap steel prices.

This favorable impact for the year ended December 31, 2020 resulted from the increase in scrap steel prices between the date we purchased a vehicle, which influences the price we pay for a vehicle, and the date we scrapped a vehicle, which influences the price we receive for scrapping a vehicle.

The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our North America segment:

North America

Percentage of Total Segment Revenue

North America Percentage of Total Segment Revenue

Segment EBITDA for the year ended December 31, 2019 13.7 %

Decrease due to:

Increase due to:

Change in gross margin 1.7 % (1)

Change in segment operating expenses 1.3 % (2)

Change in other expense, net and net income (loss) attributable to noncontrolling interest

Segment EBITDA for the year ended December 31, 2020 16.8 %

In the table above, the sum of the individual percentages may not equal the total due to rounding.

The decrease in gross margin reflected unfavorable impacts of 0.3% and 0.2% from our wholesale and self service operations, respectively.

The decrease in wholesale gross margin is primarily attributable to (i) a shift in our sales toward lower margin products, including batteries, compared to the prior year period, and (ii) higher car costs in our salvage operations.

The decrease in self service gross margin is primarily attributable to higher car costs as a result of increases in scrap prices in the first half of the year.

While higher car costs can produce more gross margin dollars, these cars tend to have a dilutive effect on the gross margin percentage as parts revenue will typically increase at a lesser rate than the rise in average car cost.

Self service gross margin was negatively impacted in the second half of 2018 due to declining scrap steel prices as the higher cost vehicles were scrapped.

The increase in segment operating expenses as a percentage of revenue primarily reflected (i) a 0.3% increase in vehicle expenses primarily due to increased vehicle rental leases to handle incremental volumes as well as increases in fuel prices, and (ii) a 0.2% increase in freight expenses due to a higher use of, and increased prices of, third party freight, partially offset by (iii) several individually immaterial factors that had a favorable impact of 0.1% in the aggregate.

The increase in other expense, net and net income (loss) attributable to noncontrolling interest was primarily due to several individually immaterial factors that had an unfavorable impact of 0.2% in the aggregate.

(1) The increase in gross margin primarily reflected favorable impa cts of 1.2% from our wholesale operations and 0.4% from our self service operations.

Despite the adverse impact of the COVID-19 pandemic on sales volumes in our wholesale operations, wholesale gross margin was favorable primarily due to the positive impact of cost reductions from operational efficiency and rightsizing actions, higher prices of precious metals and scrap steel, and improved return rates compared to the prior year period.

The increase in self service gross margin was primarily attributable to higher prices of precious metals as well as sequential increases in scrap steel prices.

We expect downward pressure on our salvage and self service margins going into 2021 as purchase costs increased in the second half of 2020 due to the reduced availability of cars for purchase reflecting the impact of the COVID-19 pandemic.

We plan to continue to address this downward pressure through price adjustments and further operational efficiencies.

We expect commodity prices to have a favorable impact on margin, at least in the short-term, as precious metals and scrap prices hold or improve from recent levels.

(2) The decrease in segment operating expense as a percentage of revenue, despite the deleveraging impact of the organic revenue parts and services revenue decline of 13.3% compared to the prior year, on a per day basis, reflects (i) a favorable impact o f 1.6% from personnel expenses related to permanent and temporary headcount reductions, reduced hours, limitations on travel and governm ent grants in Canada and (ii) a 0.2% favorable impact from vehicle and fuel expenses due to fuel usage and prices.

The impact was partially offset by a negative leverage effect of 0.5% from facility expenses, which are largely fixed.

As the market recovers and volumes increase, we expect to bring back necessary resources to support our operations;

however, we expect that permanent actions taken this year will provide a long-term favorable impact for the segment.

Third Party Revenue .

The following table summarizes the changes in third party revenue by category in our Europe segment (in thousands):

Year Ended December 31,

Percentage Change in Revenue

Acquisition (2)

Year Ended December 31, Percentage Change in Revenue

Europe 2020 2019 Organic (1)

Acquisition and Divestiture (2)

Foreign Exchange (3)

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In the table above, the sum of the individual percentages may not equal the total due to rounding.

Parts and services revenue growth for the year varied by geography.

In our Eastern European operations, revenue grew in the high single digits due to both existing and new branches (we added 68 since the beginning of 2017).

Our Western European operations experienced slight declines to mid-single digit growth for the year due primarily to higher volumes in the second quarter of 2018 (partly attributable to the timing of the Easter holiday) offsetting softness in the remainder of the year.

While we expect to achieve lower organic growth rates in these more mature markets than in Eastern Europe, our revenue growth in 2018 was negatively impacted by competitor actions, economic conditions in certain countries, such as Italy, and warmer than normal weather conditions.

Organic growth in parts and services revenue for our Europe segment on a per day basis was 2.6% as there was one additional selling day in 2018 compared to 2017.

Acquisition related growth for the year ended December 31, 2018 included $1.1 billion, or 30.2%, $79 million, or 2.2%, and $72 million, or 2.0%, from our acquisitions of Stahlgruber and aftermarket parts distribution businesses in Poland and Belgium, respectively.

The remainder of our acquired revenue growth included revenue from our

acquisitions of 20 wholesale businesses in our Europe segment since the beginning of 2017 through the one-year anniversary of the acquisitions.

(1) The parts and services organic revenue decrease for the year ended December 31, 2020 was partially offset by having two additional selling days in 2020 compa red to the year ended December 31, 2019 .

On a per day basis, organic parts and services revenue decreased 6.9%, mainly driven by the COVID-19 pandemic disruptions in all of our European operations.

Prior to the pandemic, organic revenue in Europe had increased 0.3% through February, principally driven by the Central and Eastern European region, and to a lesser extent, Germany.

During the period of March 2020 through December 2020, organic revenue declined 8.3% on a per day basis compared to the prior year period primarily due to volume effects caused by the COVID-19 pandemic.

Germany and the Netherlands have been recovering at a faster rate, with the recovery in Italy and the U.K.

laggi ng behind.

(2) Acquisition related growth for the year ended December 31, 2020 reflected revenue from our acquisition of three immaterial wholesale businesses since the beginning of 2019 through the one-year anniversary of the acquisitions.

Reduced revenue as a result of the disposals of a non-core telecommunications operation in Germany in the second

quarter of 2020 and two smaller disposals during 2020 and a wholesale business in Bulgaria in the third quarter of 2019 more than offset the acquisition growth .

(3) Compared to the prior year, exchange rates increased our revenue growth by $62 million , or 1.1% , primarily due to the weaker U.S.

dollar against the pound sterling, euro and Czech koruna during 2018 relative to 2017.

dollar against the euro and pound sterling during the year ended December 31, 2020 relative to the prior year period.

Segment EBITDA .

Segment EBITDA increased $104 million, or 32.4%, in 2018 compared to the prior year.

Segment EBITDA decreased $27 million , or 5.9% , for the year ended December 31, 2020 compared to the prior year period.

Our Europe Segment EBITDA included a positive year over year impact of $6 million related to the translation of local currency results into U.S.

dollars at higher exchange rates than those experienced during 2017.

On a constant currency basis (i.e.

excluding the translation impact), Segment EBITDA increased by $89 million, or 27.9%, compared to the prior year.

dollars at higher exchange rates than those experienced during the year ended December 31, 2019.

On a constant currency basis (i.e., excluding the translation impact), Segment EBITDA decreased by $32 million , or 7.1% , compared to the prior year.

The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Europe segment:

Percentage of Total Segment Revenue

Europe Percentage of Total Segment Revenue

Segment EBITDA for the year ended December 31, 2019 7.8 %

Decrease due to:

Increase (decrease) due to:

Change in gross margin 0.5 % (1)

Change in segment operating expenses (0.5) % (2)

Change in other expense, net and net income (loss) attributable to noncontrolling interest

Change in other expense, net and net income attributable to continuing noncontrolling interest

Segment EBITDA for the year ended December 31, 2020 7.8 %

In the table above, the sum of the individual percentages may not equal the total due to rounding.

The decline in gross margin was due to (i) a 0.6% decrease related to our U.K.

operations primarily as a result of incremental costs related to the national distribution facility, principally due to replenishment issues and related stock availability in the first quarter at our national distribution center and branches that led to some temporary service issues and increased labor costs to manually stock and receive product, and higher customer incentives, partially offset by increased supplier rebates, and (ii) a 0.3% net decrease due to mix related to our acquisition of an aftermarket parts distribution business in Poland during the third quarter of 2017.

The unfavorable effects were partially offset by (i) a 0.4% increase in gross margin in our Benelux operations primarily due to increased supplier rebates and the ongoing move from a three-step to a two-step distribution model, and (ii) a 0.3% favorable impact related to an increase in supplier rebates as a result of centralized procurement for our Europe segment.

The increase in segment operating expenses as a percentage of revenue was primarily due to a 0.4% increase in personnel expenses principally as a result of (i) negative leverage effect, as personnel costs grew at a greater rate than organic revenue, and (ii) increased headcount in our Eastern European operations as new branches were opened, as well as wage inflation due to low unemployment in the region.

Additionally, a 0.2% increase in professional fees, primarily due to new information technology projects and other system enhancements, added to the unfavorable change in segment operating expenses.

The unfavorable effects were partially offset by a 0.2% decrease in freight expenses due to a decreased use of third party freight in our U.K.

(1) The increase in gross margin was primarily attributable to favorable impacts of (i) 0.2% across almost all our operations principally as a result of margin improvement initiatives supporting the pursuit of profitable revenue growth and (ii) 0.2% from the disposal of a non-core telecommunications operation in Germany in the second quarter of 2020 .

(2) The increase in segment operating expenses as a percentage of revenue reflects unfavorable impacts of (i) 0.2% from bad debt expense due to the downturn in economic conditions caused by the COVID-19 pandemic, (ii) 0.2% in transformation expenses related to the 1 LKQ Europe program, and (iii) several individually immaterial factors that had an unfavorable impact of 0.4% in the aggregate.

These negative impacts were partially mitigated by actions to reduce personnel expense which generated a favorable impact of 0.3% .

Despite the deleveraging impact from the third party parts and services organic revenue decline of 6.9% on a per day basis, management was able to utilize government assistance, permanent and temporary headcount reductions, and limited travel expenses to achieve this 0.3% reduction as a percentage of revenue.

As the markets recovered from the second quarter low point, volumes increased and government programs ceased, we brought back necessary resources to support our operations;

however, we expect that permanent actions taken this year will provide a long-term favorable impact for the segment.

Third Party Revenue .

The following table summarizes the changes in third party revenue by category in our Specialty segment (in thousands):

Year Ended December 31,

Percentage Change in Revenue

Acquisition (2)

Foreign Exchange

Year Ended December 31, Percentage Change in Revenue

Specialty 2020 2019 Organic (1)

Acquisition and Divestiture Foreign Exchange Total Change

Parts & services revenue $ 1,505,340 $ 1,459,396 3.0 % 0.3 % (0.1) % 3.1 %

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In the table above, the sum of the individual percentages may not equal the total due to rounding.

Organic growth in parts and services revenue was primarily due to higher volumes across both our automotive and RV businesses, largely due to expansion of our product line coverage, strong exclusive line performance, and year over year growth of new vehicle sales of pickups, sport utility vehicles and other highly accessorized vehicles.

Organic growth in parts and services revenue for our Specialty segment on a per day basis was 4.2% as there was one additional selling day in 2018 compared to 2017.

Acquisition related growth in 2018 included $110 million, or 8.4%, from our acquisition of Warn through the one-year anniversary of the acquisition date.

The remainder of our acquired revenue growth reflected an immaterial amount of acquired revenue from our acquisitions of three wholesale businesses from the beginning of 2017 up to the one-year anniversary of the acquisition dates.

(1) Parts and services organic revenue increased 3.0% for the year ended December 31, 2020 compared to the prior year.

On a per day basis, organic revenue increas ed 2.6%.

T he organic increa se was primarily due to strong demand for recreational vehicle products and high drop ship fulfillment.

We believe that organic growth was constrained by the

impact of availability issues at certain suppliers that were not able to meet our demand due to the COVID-19 pandemic.

Segment EBITDA .

Segment EBITDA increased $26 million, or 18.5%, in 2018 compared to the prior year.

Segment EBITDA increased $1 million, or 0.9%, for the year ended December 31, 2020 compared to the prior year.

The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Specialty segment:

Percentage of Total Segment Revenue

Specialty Percentage of Total Segment Revenue

Segment EBITDA for the year ended December 31, 2019 11.0 %

Increase (decrease) due to:

(Decrease) increase due to:

Change in gross margin (0.6) % (1)

Change in segment operating expenses 0.5 % (2)

Change in other expense, net

Segment EBITDA for the year ended December 31, 2020 10.8 %

In the table above, the sum of the individual percentages may not equal the total due to rounding.

The increase in gross margin reflected favorable impacts of (i) 0.8% from our acquisition of Warn, which has a higher gross margin than our other Specialty operations, and (ii) 0.6% from our initiatives to improve gross margin.

The favorable effects were partially offset by 0.2% of increased inventory write-downs as damaged and defective product was identified during our warehouse expansion projects on the West Coast and in the Southeastern U.S.

The increase in segment operating expenses reflected unfavorable impacts of (i) 0.3% in personnel costs primarily due to wage inflation, increased distribution expenses driven by a decreased use of third party freight and increased delivery routes to improve service levels, as well as higher employee benefit costs, (ii) 0.2% in vehicle and fuel expenses primarily due to increased fuel prices, and (iii) by several individually immaterial factors that had an unfavorable impact of 0.1% in the aggregate.

The increase in other expense, net is due to several individually immaterial factors that had an unfavorable impact of 0.2% in the aggregate.

(1) The decrease in gross margin primarily reflects unfavorable impacts of (i) 0.7% due t o unfavorable product and channel mix for the year ended December 31, 2020 and (ii) 0.4% driven by higher product cost due to lower supplier discounts received in the current year compared to the prior year, partially offset by a favorable impact of (iii) 0.5% due to freight income, reflecting higher shipping and handling fees tied to increased usage of third party carriers (the offsetting delivery cost is a component of freight expense as mentioned below in the operating expenses discussion).

(2) The decrease in se gment operating expenses reflects a favorable impact of (i) 1.2% in personnel costs due to reduced headcount and reduced hours, partially offset by (ii) a 0.5% unfavorable impact in freight, vehicle and fuel expenses due to an increased use of third party freight, and (iii) several individually immaterial factors that had an unfavorable impact of 0.2% in the aggregate.

Liquidity and Capital Resources

The following table summarizes liquidity data as of the dates indicated (in thousands):

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Cash and cash equivalents $ 312,154 $ 523,020

Total debt (1)

2,896,676 4,072,026

Current maturities (2)

58,810 326,648

Capacity under credit facilities (3)

3,260,000 3,260,000

Availability under credit facilities (3)

2,546,081 1,922,671

Total liquidity (cash and cash equivalents plus availability under credit facilities)

2,858,235 2,445,691

(1) Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of $26 million and $30 million as of December 31, 2020 and December 31, 2019, respectively).

4 unchanged sentences

Our primary sources of liquidity are cash flows from operations and our credit facilities.

We utilize our cash flows from operations to fund working capital and capital expenditures, with the excess amounts going towards funding acquisitions, paying down outstanding debt or repurchasing LKQ stock.

As we have pursued acquisitions as part of our growth strategy, our cash flows from operations have not always been sufficient to cover our investing activities.

To fund our acquisitions, we have accessed various forms of debt financing, including revolving credit facilities, senior notes and our receivables securitization facility.

As we have pursued acquisitions as part of our historical growth strategy, our cash flows from operations have not always been sufficient to cover our investing activities.

To fund our acquisitions, we have accessed various forms of debt financing, including revolving credit facilities, senior notes and a receivables securitization facility.

As of December 31, 2020, we had debt outstanding and additional available sources of financing as follows:

Senior secured credit facilities maturing in January 2024, composed of term loans totaling $350 million ( $341 million outstanding at December 31, 2019 ) and $3.15 billion in revolving credit ( $1.3 billion outstanding at December 31, 2019 ), bearing interest at variable rates (although a portion of the outstanding debt is hedged through interest rate swap contracts), with availability reduced by $69 million of amounts outstanding under letters of credit

Notes (2023) totaling $600 million , maturing in May 2023 and bearing interest at a 4.75% fixed rate (redeemed in full on January 10, 2020)

• Senior secured credit facilities maturing in January 2024, composed of term loans totaling $350 million ($324 million outstanding at December 31, 2020) and $3.15 billion in revolving credit ($643 million outstanding at December 31, 2020), bearing interest at variable rates (although a portion of the outstanding debt is hedged through interest rate swap contracts), with availability reduced by $71 million of amounts outstanding under letters of credit

• Euro Notes (2024) totaling $611 million (€500 million), maturing in April 2024 and bearing interest at a 3.875% fixed rate

1 unchanged sentence

• Receivables securitization facility with availability up to $110 million (no outstanding balance as of December 31, 2020), maturing in November 2021 and bearing interest at variable commercial paper rates

As of December 31, 2020, we had approximately $2.5 billion available under our credit facilities.

Combined with $312 million of cash and cash equivalents at December 31, 2020, we had approximately $2.9 billion in available liquidity, an increase of $413 million from our available liquidity as of December 31, 2019.

We believe that our current liquidity and cash expected to be generated by operating activities in future periods will be sufficient to meet our current operating and capital requirements.

To support our liquidity position during the COVID-19 pandemic, we focused on preserving cash during the expected period of reduced demand.

Our action plan to strengthen our liquidity position included a deferral of growth driven capital projects, reductions in inventory orders, more active monitoring of customer receivables and terms, income and value added tax deferrals, and suspension of our share buyback program, in addition to the cost saving measures discussed in the "COVID-19 Impact on Our Operations" section above.

Given our success in strengthening our liquidity position as of September 30, 2020, we recommenced our share buyback program during the fourth quarter of 2020.

However, due to the rapidly evolving global situation, it is not possible to predict whether unanticipated consequences of the COVID-19 pandemic are reasonably likely to materially affect our liquidity and capital resources negatively in the future.

With $2.9 billion of total liquidity as of December 31, 2020 and $59 million of current maturities, we have access to funds to meet our near term commitments even if the pandemic effect extends longer than our current expectations.

We have a surplus of current assets over current liabilities, which further reduces the risk of short term cash shortfalls.

Our capital preservation plans delivered the desired results as we repaid approxima tely $327 million in borrowings from free cash flows generated in the fourth quarter as well as cash on hand and overall in 2020 repaid approximately $1.4 billion in borrowings.

Our total liquidity has increased by $997 million sinc e March 31, 2020, which we believe puts us in position to manage through the pandemic.

Our total liquidity inclu des availability under our senior secured credit facility, which includes the two financial maintenance covenants presented below (our required debt covenants and our actual ratios with respect to those covenants as calculated per the credit agreement as of December 31, 2020):

Covenant Level Ratio Achieved as of December 31, 2020

Maximum net leverage ratio 5.00:1.00 1.9

Minimum interest coverage ratio 3.00:1.00 14.6

The terms net leverage ratio and minimum interest coverage ratio used in the credit agreement are specifically calculated per the credit agreement and differ in specified ways from comparable GAAP or common usage terms.

We amended our senior secured credit facility in June 2020 to increase the maximum net leverage ratio effective with our compliance certificate filed with respect to the second quarter of 2020;

refer to "Senior Secured Credit Agreement" in Note 10, "Long-Term Obligations" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for information on the June 2020 amendment.

We entered into the amendment out of an abundance of caution to reduce the risk of breaching the net leverage covenant if the pandemic had a severe and extended effect on profitability.

Our internal models from the first quarter of 2020 suggested that we would be able to meet our payment obligations during the pandemic, but there was a risk that we might exceed the maximum 4.0x net leverage ratio in the event a severe downside scenario developed.

With the amendment and the better than forecasted perform ance since the pandemic began, we believ e that we have significantly reduced

the risk of a covenant breach, including by reducing our net leverage ratio further in the third and fourth quarters of 2020 relative to the second quarter.

The indentures relating to our Euro Notes d o not include financial maintenance covenants, and the indentures will not restrict our ability to draw funds on the credit facility.

The indentures do not prohibit amendments to the financial covenants under the credit facility as needed.

In the long term, while we believe that we have adequate capacity under our existing credit facilities, from time to time we may need to raise additional funds through public or private financing, strategic relationships or other arrangements.

There can be no assurance that additional funding, or refinancing of our credit facilities, if needed, will be available on terms attractive to us, or at all.

Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants or higher interest costs.

Our failure to raise capital if and when needed could have a material adverse impact on our business, operating results, and financial condition.

From time to time, we may undertake financing transactions to increase our available liquidity, such as (i) our November 2018 amendment to our senior secured credit facility and (ii) the issuance of the Euro Notes (2026/28) in April 2018 related to the Stahlgruber acquisition.

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If we see an attractive acquisition opportunity, we have the ability to use our revolver to move quickly and have certainty of funding up to the amount of our then-available liquidity.

In December 2019, we announced our intention to redeem our U.S.

In January 2020, we redeemed our U.S.

Notes (2023) to eliminate higher cost debt with lower interest rate borrowings on our credit facilities and cash on hand.

We completed the redemption in January 2020.

As of December 31, 2019 , we had approximately $1.9 billion available under our credit facilities.

Combined with approximately $523 million of cash and cash equivalents at December 31, 2019 , we had approximately $2.4 billion in available liquidity, an increase of $416 million over our available liquidity as of December 31, 2018 .

We believe that our current liquidity and cash expected to be generated by operating activities in future periods will be sufficient to meet our current operating and capital requirements, although such sources may not be sufficient for future acquisitions depending on their size.

While we believe that we have adequate capacity, from time to time we may need to raise additional funds through public or private financing, strategic relationships or other arrangements.

There can be no assurance that additional funding, or refinancing of our credit facilities, if needed, will be available on terms attractive to us, or at all.

Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants or higher interest costs.

Our failure to raise capital if and when needed could have a material adverse impact on our business, operating results, and financial condition.

Beginning in 2019, a number of our European suppliers began participating in supply chain financing programs in select countries under which they may sell their accounts receivable to the participating financial institutions, allowing us to extend payment terms.

We expect more suppliers will begin participating in supply chain financing programs in 2020.

Financial institutions participate in the supply chain financing program on an uncommitted basis and can cease purchasing receivables from our suppliers at any time.

These programs are at the sole discretion of both the supplier and the financial institution on terms that are negotiated between them.

If the financial institutions did not continue to purchase receivables from our suppliers under these programs, the participating vendors may have a need to renegotiate their payment terms with us, which in turn could cause our borrowings under our revolving credit facility to increase.

Borrowings under the credit agreement accrue interest at variable rates which are tied to the LIBOR or the Canadian Dollar Offered Rate ("CDOR"), depending on the currency and the duration of the borrowing, plus an applicable margin rate that is subject to change quarterly based on our reported leverage ratio.

Beginning in 2019, a number of our European suppliers began participating in a supply chain financing initiative in select countries under which they may sell their accounts receivable to the participating financial institutions, allowing us to extend payment terms which in turn improves our operating cash flows.

The initiative allows our suppliers to monetize the receivables prior to their payment date, subject to payment of a discount.

We expect more suppliers will begin participating in our European supply chain financing initiative in 2021.

Financial institutions participate in the supply chain financing initiative on an uncommitted basis and can cease purchasing receivables from our suppliers at any time.

The initiative is at the sole discretion of both the supplier and the financial institution on terms that are negotiated between them.

In the future, if the financial institutions did not continue to purchase receivables from our suppliers under the initiative, the participating vendors may have a need to renegotiate their payment terms with us, which in turn could cause our borrowings under our revolving credit facility to increase.

All outstanding payments owed under the initiative to the participating financial institutions are recorded within Accounts payable in our Consolidated Balance Sheets.

Borrowings under the credit agreement accrue interest at variable rates which are tied to LIBOR or the Canadian Dollar Offered Rate ("CDOR"), depending on the currency and the duration of the borrowing, plus an applicable margin rate that is subject to change quarterly based on our reported leverage ratio.

We hold interest rate swaps to hedge the variable rates on a portion of our credit agreement borrowings, with the effect of fixing the interest rates on the respective notional amounts.

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Including our senior notes, our overall weighted average interest rate on borrowings was 3.1% at December 31, 2020.

After 2021, it is unclear whether banks will continue to provide LIBOR submissions to the administrator of LIBOR, and no consensus currently exists as to what benchmark rate or rates may become accepted alternatives to LIBOR.

After 2021, it is unclear whether banks will continue to provide LIBOR submissions to the administrator of LIBOR.

At this time, no consensus exists as to which reference rate or rates may become accepted alternatives to LIBOR, although the Alternative Reference Rates Committee, a group of market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has identified the Secured Overnight Financing Rate (“SOFR”) as the recommended alternative to LIBOR.

On November 30, 2020, ICE Benchmark Administration, the administrator of LIBOR, with the support of the United States Federal Reserve and the United Kingdom’s Financial Conduct Authority, announced plans to consult on ceasing publication of USD LIBOR on December 31, 2021 for the one week and two month USD LIBOR tenors, and on June 30, 2023 for all other USD LIBOR tenors.

While this announcement extends the transition period to June 2023, the United States Federal Reserve concurrently issued a statement advising banks to stop new USD LIBOR issuances by the end of 2021.

We cannot currently predict the effect of the discontinuation of, or other changes to, LIBOR or any establishment of alternative reference rates in the United States, the European Union or elsewhere on the global capital markets.

The uncertainty regarding the future of LIBOR, as well as the transition from LIBOR to any alternative reference rate or rates, could have adverse impacts on our variable rate obligations that currently use LIBOR as a benchmark rate.

We are in the process of evaluating our financing obligations and other contracts that refer to LIBOR.

Outstanding debt under our Credit Agreement, which constitutes the most significant of our LIBOR-based debt obligations, contains provisions that address the potential discontinuation of LIBOR and facilitate the adoption of an alternate rate of interest.

We do not believe that the discontinuation of LIBOR, or its replacement with an alternative reference rate or rates, will have a material impact on our results of operations, financial position or liquidity.

Cash interest payments were $143 million for the year ended December 31, 2019 , including $92 million in semi-annual interest payments on our U.S.

Notes (2023), Euro Notes (2024) and Euro Notes (2026/2028).

We do not believe that the discontinuation of LIBOR, or its replacement with an alternative reference rate or rates, such as the SOFR, will have a material impact on our results of operations, financial position or liquidity.

Cash interest payments were $107 million for the year ended December 31, 2020, including $64 million in semi-annual interest payments on our Euro Notes (2024) and Euro Notes (2026/2028).

Interest payments on our Euro Notes (2024) and Euro Notes (2026/2028) are made in April and October.

We had outstanding credit agreement borrowings of $1.6 billion and $1.7 billion at December 31, 2019 and December 31, 2018 , respectively.

Of these amounts, $18 million and $9 million was classified as current maturities at December 31, 2019 and 2018 , respectively.

We had outstanding credit agreement borrowings of $967 million and $1.6 billion at December 31, 2020 and December 31, 2019, respectively.

Of these amounts, $18 million was classified as current maturities at December 31, 2020 and 2019, respectively.

The scheduled maturities of long-term obligations outstanding at December 31, 2020 are as follows (in thousands):

Years ending December 31:

2024 1,532,638

Thereafter 1,239,630

Total debt (2)

Of the $600 million U.S.

Notes (2023) that were redeemed in January 2020, in the table above $185 million is included in 2020 (reflecting the amount repaid with cash on hand), $105 million is included in 2021 (reflecting the amount repaid using borrowings under the receivables securitization facility), and $310 million is included in 2024 (reflecting the amount repaid using borrowings under the revolving credit facility).

(1) Maturities of long-term obligations due by December 31, 2021 includes $24 million of short-term debt that may be extended beyond the current due date.

(2) The total debt amounts presented above reflect the gross values to be repaid (excluding debt issuance costs of $26 million as of December 31, 2020).

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We were in compliance with all restrictive covenants under our credit agreement as of December 31, 2020.

The following summarizes our required debt covenants and our actual ratios with respect to those covenants as calculated per the credit agreement as of December 31, 2019:

Covenant Level

Ratio Achieved as of December 31, 2019

Maximum net leverage ratio

Minimum interest coverage ratio

As of December 31, 2020, the Company had cash and cash equivalents of $312 million, of which $275 million was held by foreign subsidiaries.

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Distributions of dividends from our foreign subsidiaries, if any, would be generally exempt from further U.S.

taxation, either as a result of the new 100% participation exemption under the Tax Act, or due to the previous taxation of foreign earnings under the transition tax and the GILTI regime.

taxation, either as a result of the 100% participation exemption under the Tax Act, or due to the previous taxation of foreign earnings under the transition tax and the GILTI regime.

We believe that we have sufficient cash flow and liquidity to meet our financial obligations in the U.S.

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We may, from time to time, choose to selectively repatriate foreign earnings if doing so supports our financing or liquidity objectives.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

The procurement of inventory is the largest operating use of our funds.

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Year Ended December 31,

2020 2019 Change (1)

North America $ 1,033,500 $ 1,372,600 $ (339,100)

In North America, aftermarket purchases during the year ended December 31, 2019 decreased compared to the prior year period primarily as a result of an increased focus on inventory reduction.

In our Europe segment, the increase in purchases during the year ended December 31, 2019 was primarily driven by (i) a $588 million increase attributable to incremental inventory purchases as a result of our acquisition of Stahlgruber in the second quarter of 2018, partially offset by (ii) a $79 million decrease attributable to our U.K.

operations primarily due to inventory reduction efforts.

There was also a decrease of $168 million in inventory purchases attributable to the decrease in the value of the euro and pound sterling in the year ended December 31, 2019 compared to the prior year period.

Specialty inventory purchases increased $20 million during the year ended December 31, 2019 compared to the prior year period primarily as a result of targeted purchases to increase annual supplier rebate achievement and build stock to support our 2020 initiatives.

Europe 3,503,300 3,966,000 (462,700) (2)

Specialty 1,056,200 1,107,200 (51,000)

Total $ 5,593,000 $ 6,445,800 $ (852,800)

(1) Inventory purchases across all segments have decreased due to a slowdown in procurement beginning in March 2020 as a response to the COVID-19 pandemic.

(2) The decrease in inventory purchases in our Europe segment was partially offset by an increase of $71 million attributable to the increase in the value of the euro, and to a lesser extent, the pound sterling, in the year ended December 31, 2020 compared to the prior year period.

The following table sets forth a summary of our global wholesale salvage and self service procurement of vehicles for the years ended December 31, 2020 and 2019 (in thousands):

Year Ended December 31,

2020 2019 % Change

North America wholesale salvage cars and trucks 230 309 (25.6) %

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Self service and "crush only" cars 574 591 (2.9) %

(1) Compared to the prior year, we have increased the number of self service and "crush only" vehicles purchased in 2019 to support growth in our operations.

Salvage purchases decreased relative to the prior year as we reduced buying to reflect lower demand during the COVID-19 pandemic.

Purchasing began to increase as the second quarter progressed and revenue increased and continued to increase through the fourth quarter.

Self service vehicle purchases declined due to supply constraints as certain outlets, such as city impound lots, were unavailable for a portion of the year and individuals held onto vehicles longer during the lockdown measures.

Purchases increased towards the end of June 2020 and continued to increase through the end of the fourth quarter.

We expect to continue to increase inventory purchases in the first quarter of 2021 to support the service and fill rate requirements of our businesses based on the revenue trend and expectations for 2021, including normal seasonality as we continue into winter.

However, we expect to be able to operate effectively at a lower inventory balance than at the end of 2019.

The following table summarizes the components of the year-over-year increase in cash provided by operating activities (in millions):

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Non-cash depreciation and amortization expense

Impairment of net assets held for sale and goodwill

Loss/gain on disposal of businesses and impairment of net assets held for sale (44) (2)

Cash paid for taxes

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Working capital accounts:

Accounts receivable

Receivables, net 67

Inventories 418

Accounts payable

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(1) Refer to the Results of Operations – Consolidated section for further information on the increase in operating income.

Non-cash depreciation and amortization expense increased compared to the prior year period as discussed in the Results of Operations – Consolidated section.

In the years ended December 31, 2019 and 2018, we recorded impairment charges on net assets held for sale and goodwill, noting that the 2019 charges exceeded the prior year by $14 million.

(2) Refer to "Net Assets Held for Sale" in Note 4, "Summary of Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for information on the net impairment activity recorded for the years ended December 31, 2020 and December 31, 2019.

(3) Cash payments related to income taxes increased for U.S.

federal and state income taxes due to (i) $94 million increase in income from continuing operations before income taxes, (ii) tax payment benefits from the loss on disposal of our aviation business in 2019, and (iii) 2018 overpayment credits carried forward into 2019.

(4) Cash flows related to our primary working capital accounts can be volatile as the purchases, payments and collections can be timed differently from period to period.

Inventory represented an incremental $143 million in cash inflows in 2019 as a result of deliberate inventory reduction efforts in the Europe and North America segments to reflect organic revenue conditions, as disclosed in the procurement section above.

Accounts payable produced an incremental $81 million in cash inflows primarily due to timing effects related to our May 30, 2018 acquisition of Stahlgruber.

Additionally, we increased accounts payable through extension of vendor terms in North America.

The supply chain financing programs in Europe did not have a material impact on accounts payable in 2019.

Accounts receivable represented an incremental $26 million in cash inflows in 2019, primarily attributable to focus on collections in our Specialty segment and U.K.

operations, which was partially offset by timing effects from the Stahlgruber acquisition, and to a lesser extent, the unwind of a receivables factoring program at Stahlgruber.

Reflects a number of individually insignificant fluctuations in cash paid for other operating activities.

Net cash used in investing activities totaled $265 million for the year ended December 31, 2019 , compared to $1.5 billion of cash used in investing activities during the year ended December 31, 2018 .

We invested $27 million of cash, net of cash acquired, in business acquisitions during the year ended December 31, 2019 compared to $1.2 billion during the year ended December 31, 2018 .

Receivables, net w as a $67 million grea ter infl ow in 2020 primarily due to greater cash conversion of accounts receivable balances in the year 2020 in the Europe segment (of $60 million) and the North America segment (of $38 million) and the lower revenues due to the COVID-19 pandemic.

The inflows in North America and Europe were partially offset by outflows for the Specialty segment (of $31 million) as a result of increased revenues in the fourth quarter of 2020.

Inventories represented $418 million in incremental cash inflows in the year 2020 as a result of inventory decreases in the (i) Europe segment of $167 million, (ii) North America segment of $141 million, and (iii) Specialty segment of $110 million, due to a slowdown in inventory purchases starting in March 2020 due to the COVID-19 pandemic as we aligned our inventory balances to the projected demand.

Accounts payable produced $68 million in higher cash outflows primarily due to lower accounts payable balances in the North America segment (of $259 million) and the Specialty segment (of $8 million) compared to the prior year period, as a result of a slowdown in inventory purchases due to the COVID-19 pandemic, partially offset by cash inflows for the Europe segment (of $199 million) primarily due to benefits from both improved payment terms and our supply chain financing initiative.

(5) Cash flows from other operating activities decreased $18 million as a result of the timing of value added tax payables payments compared to the prior year.

The remaining amount reflects a number of individually insignificant fluctuations in cash paid for other operating activities.

Net cash used in investing activities totaled $166 million and $265 million for the years ended December 31, 2020 and 2019, respectively.

Property, plant and equipment purchases were $173 million in 2020 compared to $266 million in the prior year.

The period over period increase in cash outflows for purchases of property, plant and equipment was primarily related to our Europe segment.

We received $18 million of net proceeds from divestitures of assets held for sale during the year ended December 31, 2019 ;

no such proceeds were received in 2018.

Net cash used in financing activities totaled $601 million for the year ended December 31, 2019 , compared to net cash provided by financing activities of $883 million during the year ended December 31, 2018 .

We received proceeds of $1.2 billion from our issuance of the Euro Notes (2026/28) during the year ended December 31, 2018 ;

no such proceeds were received in the current year.

We repurchased $292 million of our common stock during the year ended December 31, 2019 compared to $60 million during the year ended December 31, 2018 .

We also paid $21 million of debt issuance costs during 2018 , primarily related to the issuance of the Euro Notes (2026/28);

no such costs were incurred in 2019.

During the year ended December 31, 2019 , net repayments of our borrowings totaled $301 million compared to $273 million during the year ended December 31, 2018 .

We intend to continue to evaluate markets for potential growth through the internal development of distribution centers, processing and sales facilities, and warehouses, through further integration of our facilities, and through selected business acquisitions.

Our future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of our internal development efforts and the success of those efforts, the costs and timing of expansion of our sales and marketing activities, and the costs and timing of future business acquisitions.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

The following table sets forth a summary of our aftermarket and manufactured inventory procurement for the years ended December 31, 2018 and 2017 (in thousands):

Year Ended December 31,

North America

In North America, aftermarket purchases during the year ended December 31, 2018 increased compared to the comparable prior year period to support growth across our operations.

In our Europe segment, the increase in purchases during the year ended December 31, 2018 was primarily driven by (i) an $821 million increase attributable to inventory purchases at Stahlgruber from the date of acquisition through December 31, 2018 , (ii) a $181 million increase primarily attributable to our Eastern Europe operations, of which $73 million was due to incremental inventory purchases in the first seven months of 2018 as a result of our acquisition of an aftermarket parts distribution business in Poland in the third quarter of 2017 ;

the remaining increase was primarily due to branch expansion in Eastern Europe, and (iii) a $146 million increase in purchases at our Benelux operations, of which $41 million was attributable to incremental inventory purchases in the first six months of 2018 as a result of our acquisitions of aftermarket parts distribution businesses in Belgium in the third quarter of 2017 .

There was also an increase of $88 million in inventory purchases driven by the increase in the value of the euro and pound sterling in 2018 compared to 2017 .

In our Specialty segment, the acquisition of Warn in November 2017 added incremental purchases of $71 million during the year ended December 31, 2018 , which includes purchases of aftermarket inventory and raw materials used in the manufacturing of specialty products.

Specialty inventory purchases also increased during the year ended December 31, 2018 compared to the prior year to support growth in our operations.

The following table sets forth a summary of our global wholesale salvage and self service procurement of vehicles for the years ended December 31, 2018 and 2017 (in thousands):

The period over period decrease in cash outflows for purchases of property, plant and equipment was due to decreased capital spending across our businesses as a result of the COVID-19 pandemic.

We invested $7 million of cash, net of cash acquired, in business acquisitions during the year ended December 31, 2020 compared to $27 million during the year ended December 31, 2019.

We received $22 million of net proceeds from divestitures of businesses held for sale and property, plant and equipment during the year ended December 31, 2020 compared to $35 million in the prior year period.

The following table reconciles Net Cash Provided by Operating Activities to Free Cash Flow (in thousands):

Year Ended December 31,

North America wholesale salvage cars and trucks

Europe wholesale salvage cars and trucks

Self service and "crush only" cars

(1) Compared to the prior year, we have increased the number of self service and "crush only" vehicles purchased in 2018 to support growth in our operations.

The following table summarizes the components of the year-over-year increase in cash provided by operating activities (in millions):

Net cash provided by operating activities for the year ended December 31, 2017

Increase (decrease) due to:

Operating income

Non-cash depreciation and amortization expense

Impairment of net assets held for sale and goodwill

Cash paid for taxes

Cash paid for interest

Working capital accounts:

Accounts receivable

Accounts payable

Pension funding

Other operating activities

Net cash provided by operating activities for the year ended December 31, 2018

Refer to the Results of Operations - Consolidated section for further information on the increase in operating income.

Non-cash depreciation and amortization expense increased compared to the prior year period as discussed in the Results of Operations - Consolidated section.

In the fourth quarter of 2018, we recorded an impairment charge on the goodwill in our Aviation reporting unit.

See "Intangible Assets" in Note 4, "Summary of Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on the impairment charge.

Cash flows related to our primary working capital accounts can be volatile as the purchases, payments and collections can be timed differently from period to period and can be influenced by factors outside of our control.

Includes an outflow of $116 million related to Stahlgruber, primarily resulting from the timing of the acquisition.

Due to the timing of processing invoice payments after the closing date, we assumed a larger payable balance but acquired more cash at closing.

However, the cash acquired at closing is reflected in the Investing section of the cash flow statement on the Acquisitions, net of cash and restricted cash acquired line.

During the year ended December 31, 2018 , we made a special contribution of $9 million to one of our North America pension plans.

See Note 14, "Employee Benefit Plans" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on our pension plans.

Reflects a number of individually insignificant fluctuations in cash paid for other operating activities.

Net cash used in investing activities totaled $1.5 billion for the year ended December 31, 2018 , compared to $385 million of cash used in investing activities during the year ended December 31, 2017 .

We invested $1.2 billion of cash, net of cash acquired, in business acquisitions during the year ended December 31, 2018 compared to $513 million during the year ended December 31, 2017 .

We received net proceeds from the sale of our glass manufacturing business totaling $301 million during the year ended December 31, 2017 ;

no such proceeds were received in 2018 .

Property, plant and equipment purchases were $250 million in 2018 compared to $179 million in the prior year.

The period over period increase in cash outflows for purchases of property, plant and equipment was primarily related to our North America and Europe segments.

We had $28 million of proceeds from the disposals of property, plant and equipment in 2018 compared to $9 million in the prior year;

the increase was primarily related to our North America segment.

We invested $60 million in unconsolidated subsidiaries in 2018 compared to $8 million in the prior year, primarily due to the $48 million Mekonomen rights issue in the fourth quarter of 2018 ;

there was no rights offering in 2017 .

During the year ended December 31, 2018 , we received $37 million of deferred purchase price proceeds on receivables under our factoring arrangement that was acquired in our Stahlgruber acquisition;

no such proceeds were received in 2017 .

The arrangement was subsequently terminated in December 2018.

Net cash provided by financing activities totaled $883 million for the year ended December 31, 2018 , compared to net cash used in financing activities of $113 million during the year ended December 31, 2017 .

We received proceeds of $1.2 billion from our issuance of the Euro Notes (2026/28) during the year ended December 31, 2018 ;

no such proceeds were received in the prior year.

We repurchased $60 million of our common stock during 2018 following the Board of Directors' authorization of a stock repurchase program in October 2018;

we did not repurchase any common stock during 2017 .

We also paid $21 million of debt issuance costs during 2018 , primarily related to the issuance of the Euro Notes (2026/28), compared to $4 million paid during 2017 in connection with our December 2017 amendment of our credit facilities.

During the year ended December 31, 2018 , net repayments of our borrowings totaled $273 million compared to $115 million during the year ended December 31, 2017 .

During the year ended December 31, 2018 , foreign exchange rates decreased cash, cash equivalents and restricted cash by $77 million, compared to an increase of $24 million in the prior year.

The current year impact was primarily related to a $66 million decrease resulting from the decline in the euro exchange rate between April 9, 2018, the date we received the proceeds from the Euro Notes (2026/28), and May 30, 2018, the date we paid the cash proceeds for the Stahlgruber acquisition.

Net cash provided by operating activities $ 1,443,870 $ 1,064,033

purchases of property, plant and equipment

172,695 265,730

Free cash flow $ 1,271,175 $ 798,303

Net cash used in financing activities totaled $1.5 billion and $601 million for the years ended December 31, 2020 and 2019, respectively.

During the year ended December 31, 2020, net repayments of our borrowings totaled $1.4 billion compared to $301 million during the year ended December 31, 2019.

The period over period increase in net repayments of our borrowings includes the $600 million repayment of our U.S.

Notes (2023) in January 2020.

We repurchased $117 million of our common stock in the year ended December 31, 2020, compared to $292 million in the year ended December 31, 2019.

Although our efforts are currently scaled back due to the COVID-19 pandemic, we intend to continue to evaluate markets for potential growth through the internal development of distribution centers, processing and sales facilities, and warehouses, through further integration of our facilities, and through selected business acquisitions.

Off-Balance Sheet Arrangements and Future Commitments

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As of December 31, 2020, there were letters of credit outstanding in the aggregate amount of $71 million.

We guarantee the residual values for the majority of our vehicles.

We guarantee the residual values for the majority of our leased vehicles.

Had we terminated all of our operating leases subject to these guarantees at December 31, 2020, our portion of the guaranteed residual value would have totaled approximately $63 million.

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The following table represents our future commitments under contractual obligations as of December 31, 2020 (in millions):

Total Less than

1 Year 1-3 Years 3-5 Years More than

Contractual obligations

Long-term debt (1)

$ 3,275.6 $ 140.5 $ 225.8 $ 1,628.5 $ 1,280.8

Finance lease obligations (2)

69.0 13.1 19.3 12.2 24.4

Operating leases (3)

1,877.5 298.1 473.4 328.8 777.2

Purchase obligations (4)

831.8 831.8 — — —

Other long-term obligations (5)

258.2 128.5 94.7 30.0 5.0

Total $ 6,312.1 $ 1,412.0 $ 813.2 $ 1,999.5 $ 2,087.4

(1) Our long-term debt under contractual obligations above includes interest of $436 million on the balances outstanding as of December 31, 2020.

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Estimated interest expense beyond five years is $57 million.

Includes $614 million of U.S.

Notes (2023) redeemed on January 10, 2020, inclusive of principal, an early-redemption premium and interest.

Of this $614 million, $199 million is included in less than 1 year (reflecting the amount repaid with cash on hand), $105 million is included in 1-3 years (reflecting the amount repaid using borrowings under the receivables securitization facility), and $310 million is included in 3-5 years (reflecting the amount repaid using borrowings under the revolving credit facility).

(2) Interest on finance lease obligations of $12 million is included based on incremental borrowing or implied rates.

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(4) Our purchase obligations include open purchase orders for aftermarket inventory.

Our other long-term obligations consist of (i) estimated payments for our self-insurance reserves of $97 million, (ii) outstanding estimated payments of $33 million on the repatriation of earnings as a result of the Tax Act, (iii) a total of $8 million of guaranteed dividend payments to be made in quarterly installments through January 2024 to the minority shareholder of a subsidiary acquired in connection with the Stahlgruber acquisition, and (iv) $110 million representing primarily other asset purchase commitments and payments for deferred compensation plans.

(5) Our other long-term obligations consist of (i) estimated payments for our self-insurance reserves of $98 million, (ii) outstanding estimated payments of $32 million on the repatriation of earnings as a result of the Tax Act, (iii) $30 million of social security tax deferrals related to COVID-19 relief, (iv) a total of $5 million of guaranteed dividend payments to be made in quarterly installments through January 2024 to the minority shareholder of a subsidiary acquired in connection with the Stahlgruber acquisition, and (v) $93 million representing primarily other asset purchase commitments and payments for deferred compensation plans.

The table above excludes amounts related to our defined benefit pension plans.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis