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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-02-26 · 253 added, 364 removed, 331 unchanged (65% of the section changed)

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Discussion of 2019 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, 2020 and December 31, 2019 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, 2020 filed with the SEC on February 26, 2021.

Unless otherwise indicated or the context otherwise requires, as used in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," the terms "we," "us," "the Company," "our," "LKQ" and similar terms refer to LKQ Corporation and its subsidiaries.

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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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.

This acquisition expanded LKQ's geographic presence in continental Europe and serves as an additional strategic hub for our European operations.

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

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.

During the years ended December 31, 2021, 2020 and 2019, we acquired various immaterial businesses across our North America, Europe, and Specialty segments.

Sources of Revenue

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During the year ended December 31, 2021, parts and services revenue represented approximately 93% of our consolidated revenue.

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.

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

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

See Note 4, "Revenue Recognition" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to our sources of revenue.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").

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

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

Critical Accounting Estimates

The preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America ("US GAAP") requires management to make use of certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities in the Consolidated Financial Statements and accompanying notes.

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

The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities and our recognition of revenue.

Actual results may differ from these estimates.

Revenue Recognition

For information regarding our critical accounting policies related to revenue, refer to Note 5, "Revenue Recognition," to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

Inventory Accounting

For all inventory, carrying value is recorded at the lower of cost or net realizable value.

Net realizable value can be influenced by current anticipated demand.

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

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

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

Refurbished inventory cost is based upon the average price we pay for cores.

The cost of our refurbished inventory also includes expenses incurred for freight in, labor and other overhead costs.

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

Inventory carrying value is determined using the average cost to sales percentage at each of our facilities and applying that percentage to the facility's inventory at expected selling prices, the assessment of which incorporates the sales probability based on a part's days in stock and historical demand.

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

Remanufactured inventory cost is based upon the price paid for cores, and also includes expenses incurred for freight, direct manufacturing costs and overhead related to our remanufacturing operations.

The cost of manufactured product inventory is established using the first-in first-out method.

Lease Accounting

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

We record our acquisitions using the purchase method of accounting, under which the acquisition purchase price is allocated to the assets acquired and liabilities assumed based upon their respective fair values.

We utilize management estimates and, in some instances, independent third party valuation firms to assist in determining the fair values of assets acquired, liabilities assumed and contingent consideration granted.

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

We use various valuation

methods to value property, plant and equipment.

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

When valuing personal property, we typically use either the income or cost approach.

We used the relief-from-royalty method to value trade names, trademarks, software and other technology assets, and we used the multi-period excess earnings method to value customer relationships.

The relief-from-royalty method assumes that the intangible asset has value to the extent that its owner is relieved of the obligation to pay royalties for the benefits received from the intangible asset.

The multi-period excess earnings method is based on the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset charges.

Goodwill and Indefinite-Lived Intangibles Impairment

We are required to test 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.

Developing the estimated future cash flows and fair value of the reporting unit requires management's judgment in projecting revenues and profits, allocation of shared corporate costs, tax rates, capital expenditures, working capital requirements, discount rates and market multiples.

Many of the factors used in assessing fair value are outside the control of management, and it is reasonably likely that assumptions and estimates can change in future periods.

If these assumptions or estimates change in the future, we may be required to record impairment charges for these assets.

In response to changes in industry and market conditions, we may be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill.

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

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.

However, components are aggregated as a single reporting unit if they have similar economic characteristics.

For the purpose of aggregating our components into reporting units, we review the long-term performance of Segment EBITDA.

Additionally, we review qualitative factors such as type or class of customers, nature of products, distribution methods, inventory procurement methods, level of integration, and interdependency of processes across components.

Our assessment of the aggregation includes both qualitative and quantitative factors and is based on the facts and circumstances specific to the components.

We have four operating segments:

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

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

The fair value estimates are established using weightings of the results of a discounted cash flow methodology and a comparative market multiples approach.

We believe that using two methods to determine fair value limits the chances of an unrepresentative valuation.

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

Impairment may result from, among other things, deterioration in the performance of 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.

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, or in the case of our interim test, against transactions during the 2008-2009 financial crisis.

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 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.

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%.

Historically, we have not made significant changes to the methods for determining these estimates as our actual results have not differed materially from our estimates.

We do not believe it is reasonably likely that the estimates and related assumptions will change materially in the foreseeable future;

however, actual results could differ from those estimates under different assumptions, judgments or conditions.

Critical accounting estimates are those that are most important to the portrayal of our financial condition and results of operations, and which require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.

Based on this definition, we have identified the critical accounting estimates addressed below.

For additional information related to significant accounting policies used in the preparation of our Consolidated Financial Statements, see Note 3, "Summary of Significant Accounting Policies" to the accompanying Consolidated Financial Statements.

Goodwill Impairment

Goodwill is obtained through business acquisitions and recorded at the estimated fair value at the date of acquisition.

Goodwill is not amortized but instead tested for impairment annually or sooner if events indicate that an impairment may exist.

In performing this test, we compare the carrying value of the asset to its fair value.

To derive the fair value for our reporting units which carry goodwill, we consider the use of various valuation techniques, with the primary technique being an income approach via a discounted cash flow method and another being a market approach via a guideline public company method.

If the carrying value of these assets exceeds the estimated fair value, the asset is considered impaired and an impairment charge is recognized.

In performing the test for impairment of goodwill, goodwill is allocated to the reporting units expected to benefit from the business combination.

Judgments and Uncertainties

Determining whether impairment indicators exist and estimating fair values as part of impairment testing require significant judgment.

Estimating the fair values of our reporting units which have goodwill requires the use of significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy.

As part of applying the discounted cash flow method and guideline public company method, we use significant assumptions which include sales growth, operating margins, discount rates, perpetual growth rates and valuation multiples which consider our budgets, business plans, economic projections and marketplace data.

Sensitivity of Estimate to Change

We have not made material changes in the accounting methodology used to evaluate impairment of goodwill during the last three years.

The assumptions used to assess impairment consider historical trends, macroeconomic conditions, and projections consistent with the Company’s operating strategy.

Changes in these estimates can have a significant impact on the assessment of fair value which could result in material impairment losses.

During fiscal year 2021, we elected to perform a quantitative impairment test for our goodwill.

No impairment charges were recorded as a result of the testing as the fair value of each goodwill reporting unit exceeded the calculated carrying value.

A 10% decline in projected cash flows or a 10% increase in the discount rate would not have resulted in an impairment to goodwill.

Recently Issued Accounting Pronouncements

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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.

Costs related to the 1 LKQ Europe program incurred to date are reflected in Selling, general and administrative expenses, Restructuring and acquisition related 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.

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.

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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.

We have continued the project on schedule after the restart.

We completed the organizational design and implementation projects in June 2021, with the remaining projects scheduled to be completed by 2024.

During the year ended December 31, 2021, we incurred $37 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.

We expect that costs of the program, reflecting all three categories noted above, will range between $100 million and $130 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.

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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.

While our businesses were 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 year 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 2020 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.

As movement restrictions lessened in May and June of 2020, 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 of 2020 as the increasing level of COVID-19 cases, especially in the United States, slowed the recovery.

During the third quarter of 2020, organic parts and services revenue declined by 4.5% compared to the prior year period, a small improvement from the June 2020 decline of 7.3% (on a per day

During the fourth quarter of 2020, 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.

During the first quarter of 2021, organic parts and services revenue increased by 2.2% (on a per day basis) despite the continued COVID-19 impact on economic activity in the U.S.

During the second quarter of 2021, organic parts and services revenue increased by 21.1% (on a per day basis) reflecting the low prior year comparable figure owing to COVID-19 and the gradual recovery in mobility.

During the third quarter of 2021, the recovery continued with organic parts and services revenue increasing by 4.0%.

During the fourth quarter of 2021, organic parts and services revenue increased by 7.3% (on a per day basis).

Since the start of the pandemic, our revenue has been impacted to varying degrees depending on the segment, with North America experiencing the most negative impact due to the decrease in miles driven and collision activity.

Europe was also negatively affected by mobility restrictions and reduced miles driven but has experienced a quicker recovery than North America and reached its 2019 revenue level in the fourth quarter of 2021.

After seeing year over year decreases early in the pandemic, Specialty revenue has grown due to favorable trends in recreational vehicle activity and online sales.

We expect consolidated parts and services revenue to grow organically in future periods, but the level of the year over year increase in revenue will depend on, among other factors, the extent of COVID-19 related restrictions across the geographies in which we operate as strategies to address the virus evolve, the pace of recovery in miles driven and access to inventory, which has been constrained with supply chain issues.

Our top priority 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:

We implemented protocols across our business units designed 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;

encouraging vaccination of our employees;

use of personal protective equipment;

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and restricting travel.

We are monitoring developments related to variant status, vaccination levels and governmental standards and have adjusted our practices where appropriate to comply with the latest guidance.

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

In the second quarter of 2020, 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.

Since then, we have been able to sustain a portion of these cost benefits.

As revenue has increased, some of the costs that were reduced as a result of COVID-19 remained at a lower level;

the management team has implemented productivity initiatives to create lower cost structures going forward which has contributed to profitability reported in 2020 and 2021.

Inflationary pressures around wages and freight experienced in 2021 drove expenses higher, which partially offset some of the prior cost savings initiatives.

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.

During the year ended December 31, 2021, we qualified for $16 million of assistance.

We received $52 million of government assistance in 2020, with the largest portion coming in the second quarter.

We currently do not anticipate qualifying for significant additional assistance in 2022.

We also emphasized the preservation of capital in 2020 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 of 2020), and suspension of our share buyback program (which was reinstated during the fourth quarter of 2020).

This focus was successful as we improved our liquidity position at December 31, 2020 by approximately $1,000 million relative to March 31, 2020 while managing through the disruption caused by the pandemic.

Beginning in late 2020 and continuing in 2021, we returned to our stated capital allocation strategy with an emphasis on internal investments in capital expenditures and inventory, tuck-in acquisitions and share repurchases while also issuing the Company's first dividend in the fourth quarter of 2021.

In each quarter of 2020, we prepared forecasts of future revenues, profits and cash flows to use in multiple analyses, including the interim 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 showed an improving trend, with profitability in the second, third and fourth quarters all exceeding our prior forecast prepared in the first quarter of 2020.

We continued to assess COVID-19 developments and the potential impacts on our business in 2021, and will continue to do so in 2022 and update the applicable analyses as necessary.

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

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

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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.

• Segment EBITDA - Refer to Note 15, "Segment and Geographic Information,” to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on 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.

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

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

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Provision for income taxes 2.5 % 2.1 %

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

Equity in earnings of unconsolidated subsidiaries 0.2 % 0.0 %

Income from continuing operations 8.3 % 5.5 %

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

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

Net income 8.3 % 5.5 %

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

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.

The growth in parts and service s revenue of 10.7% represented increases in segment revenue of 23.8% in Specialty, 10.3% in Europe, and 6.4% in North America.

Organic parts and se rvices revenue growth was 7.9%, w hich in cluded a 0.4% negative effect from one fewer selling day for the year ended December 31, 2021 , resulting in per day organic gro wth of 8.3% as the current year effect of the pandemic was less severe than the prior year.

The increase in other revenue of 42.5% was primarily driven by a $281 million o rganic increase, largely attributable to our North America segment.

Refer to the discussion of our segment results of operations for factors contributing to the changes in revenue by segment for the year ended December 31, 2021 compared to the year ended December 31, 2020.

Cost of Goods Sold .

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.

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.

Cost of goods sold decreased t o 59.3% of revenue for the year ended December 31, 2021 from 60.5% of revenue for the year ended December 31, 2020.

The cost of goods sold decrease reflects impac ts of 0.7%, 0.4% and 0.1% in our Europe, North America and Specialty segments, respectively.

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, 2021 compared to the year ended December 31, 2020 .

Selling, General and Administrative Expenses.

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.

Our selling, general and administrative ("SG&A") expenses as a percentage of revenue decreased t o 27.3% for the year ended December 31, 2021 fro m 28.1% for the year ended December 31, 2020.

The SG&A expense decrease reflects impacts of 0.4% and 0.3% in our Europe and North America segments, respectively and 0.2% attributable to mix .

The mix impact was a result of the increased revenues in our Specialty segment, as the lower SG&A expense percentage for the Specialty segment made up a larger percentage of the consolidated results, which had a favorable effect on SG&A expense as a percentage of revenue.

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, 2021 compared to the year ended December 31, 2020.

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Total restructuring and acquisition related expenses $ 20,311 $ 66,163 $ (45,852)

(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.

(1) Restructuring expenses for the year ended December 31, 2021 primarily consisted of (i) $9 million related to our 2020 global restructuring program and (ii) $6 million related to our 1 LKQ Europe program.

(2) Restructuring expenses for the year ended December 31, 2020 primarily 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.

(3) Acquisition related expenses for the year ended December 31, 2021 primarily relate to professional fees related to completed and potential transactions.

(4) 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.

See Note 5, "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.

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.

For the year ended December 31, 2021, we recorded immaterial impairment charges on net assets held for sale, compared to $3 million of net impairment charges on net assets held for sale for the year ended December 31, 2020 primarily attributable to our Europe segment.

See "Net Assets Held for Sale" in Note 3, "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.

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Total depreciation and amortization $ 259,992 $ 272,292 $ (12,300)

(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.

(1) The increase in depreciation expense primarily reflected (i) $3 million from foreign currency translation primarily related to an increase in the euro and pound sterling exchange rates.

(2) The decrease in amortization expense primarily reflected (i) a decrease of $16 million related to the customer relationship intangible assets recorded upon our acquisition of Stahlgruber as the accelerated amortization of the customer relationship intangible assets resulted in lower amortization expense for the year ended December 31, 2021 compared to the prior year period, partially offset by (ii) a $3 million increase from foreign currency translation, primarily related to an increase in the euro exchange rate for the year ended December 31, 2021 compared to the prior year period.

Other Expense, Net.

The following table summarizes the components of the change in other expense, net (in thousands):

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

Other Expense, Net

Balance for the year ended December 31, 2020 $ 100,582

(Decrease) increase due to:

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Loss (gain) on debt extinguishment 10,813 (2)

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

Interest income and other income, net (4,447) (3)

Net decrease (25,340)

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

(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.

Balance for the year ended December 31, 2021 $ 75,242

(1) The lower interest expense is primarily related to (i) a $32 million decrease resulting from lower outstanding debt and lower interest rates for the year ended December 31, 2021 compared to the prior year period, partially offset by (ii) a $2 million increase from foreign currency translation, primarily related to an increase in the euro exchange rate.

(2) The $11 million increase in loss on debt extinguishment is due to a $24 million charge recorded in April 2021 related to the redemption of the Euro Notes (2026) compared to a $13 million charge related to the redemption of the U.S.

Notes (2023) in January 2020.

(3) The favorable variance in Interest income and other income, net primarily related to (i) $11 million of fair value adjustments in 2021 for appreciation in our equity investments not accounted for under the equity method, (ii) $6 million in pension settlement losses in the prior year related to our primary defined benefit plan in the U.S.

Plan"), (iii) several individually immaterial factors that had a favorable impact of $1 million in the aggregate, partially offset by (iv) an $8 million reduction in proceeds related to insurance settlements compared to the prior year and (v) a $5 million reduction due to a decrease in non-operating income from a North American contract.

Provision for Income Taxes.

Our effective income tax rate for the year ended December 31, 2021 was 23.6%, compared to 28.2% 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.

The 2021 base rate decreased due to higher pretax income in our international operations in the current year.

Additionally, the lower annual effective tax rate for 2021 included a 0.8% rate benefit primarily from the reversal of valuation allowances on certain interest deduction carryforwards in Europe because of improved profitability and lower interest expense.

The prior year rate was increased by 1.7% due to valuation allowances on the tax benefit of net operating loss and interest deduction carryforwards in certain jurisdictions where realization was uncertain.

See Note 14, "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 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.

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 charge.

Equity in earnings of unconsolidated subsidiaries for the year ended December 31, 2021 increas ed by $18 million related to improved year over year results reported by Mekonomen, which is our largest equity method investment, and our North America investments, which generated income in 2021 after posting losses in 2020.

See "Investments in Unconsolidated Subsidiaries" in Note 3, "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 discussion.

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, 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.

Relative to the rate used for the year ended December 31, 2020, pound sterling, Canadian dollar, Czech koruna and euro rates used to translate the 2021 statements of income increased by 7.1%, 6.9%, 6.7% and 3.6% , respectively.

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

dollar co mbined with the positive impact of realized and unrealized currency gains and losses for the year ended December 31, 2021 resulted in a $0.03 positive effect on diluted earnings per share relative to the prior year period.

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.

Net income attributable to continuing noncontrolling interest for the year ended December 31, 2021 dec reased $1 million compared to the year ended December 31, 2020.

Net income attributable to discontinued noncontrolling interest was immaterial for the year ended December 31, 2020 and related to the Stahlgruber Czech Republic wholesale business.

See Note 2, "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.

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Constant currency revenue and Segment EBITDA results are calculated by translating prior year revenue and Segment EBITDA in local currency using the current year's currency conversion rate.

This non-GAAP financial measure has important limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP.

This non-GAAP financial measure has important limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results as reported under US GAAP.

Our use of this term may vary from the use of similarly-titled measures by other issuers due to potential inconsistencies in the method of calculation and differences due to items subject to interpretation.

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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.

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equity in losses and earnings of unconsolidated subsidiaries;

equity investment fair value adjustments;

and impairment charges.

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Year Ended December 31, Percentage Change in Revenue

North America 2020 2019 Organic Acquisition and Divestiture (3)

Foreign Exchange Total Change

North America 2021 2020 Organic Acquisition and Divestiture Foreign Exchange Total Change

Parts & services revenue $ 4,243,203 $ 3,988,214 5.6 % (1)

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

(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.

(1) Parts and services organic revenue increased 5.6% (6.4% on a per day basis) for the year ended December 31, 2021 compared to the prior year period, primarily driven by pricing and growth from recycled and remanufactured major mechanical parts and aftermarket automotive glass products.

While mobility statistics have improved relative to 2020, aftermarket collision parts revenue was roughly flat year-over-year due to the constraints on availability of parts caused by supply chain issues in 2021.

Until these issues are resolved, we expect to see a negative effect on aftermarket fill rates across the sector that will impact revenue growth rates.

(2) The $276 million year over year organic increase in other revenue is primarily related to (i) a $134 million increase in revenue from scrap steel due to higher prices, (ii) an $81 million increase in revenue from precious metals (platinum, palladium, and rhodium) primarily due to higher prices, and (iii) a $61 million increase in revenue from other scrap and cores primarily related to higher prices.

Segment EBITDA.

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.

Segment EBITDA increased $166 million, or 21.3%, for the year ended December 31, 2021 despite the impact of two fewer selling days compared to the prior year period.

This increase is attributable to higher precious metals and scrap steel prices, margin initiatives, rightsizing actions and the favorable effect from the revenue recovery compared to the prior year when the COVID-19 impact was more severe.

These were partially offset by negative impacts due to aftermarket fill rates and inflationary increases in costs.

Increases in precious metals prices contributed an estimated $60 million in Segment EBITDA improvement relative to the year ended December 31, 2020.

Additionally, net sequential increases in scrap steel prices in our salvage and self service operations had a $42 million favorable impact on Segment EBITDA for the year ended December 31, 2021, compared to a $16 million favorable impact for the year ended December 31, 2020.

This favorable impact for the year ended December 31, 2021 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.

We estimate that precious metals and scrap steel pricing had a favorable effect of 1.0% on Segment EBITDA margin relative to the comparable prior year period.

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

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

Increase due to:

Increase (decrease) due to:

Change in gross margin 1.1 % (1)

Change in segment operating expenses 0.7 % (2)

Change in other expense, net and net income attributable to continuing noncontrolling interest (0.2) % (3)

Segment EBITDA for the year ended December 31, 2021 18.3 %

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

(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.

(1) The increase in gross margin primarily reflected favorable impacts from our wholesale operations.

Wholesale operations gross margin was favorable primarily due to the positive impact of higher precious metals and scrap steel prices, pricing initiatives and cost reductions from operational efficiencies and rightsizing efforts.

Compared to the prior year, input costs for our wholesale operations have risen, with (i) inflationary pressures impacting product and freight costs in aftermarket and (ii) limited supply combined with heightened competition at auctions contributing to higher salvage costs.

We are adjusting prices dynamically to address input cost increases and market conditions such as inventory availability and

demand, and, in some cases, we experienced a margin benefit in 2021 as higher prices were enacted ahead of turning the higher cost inventory.

(2) The decrease in segment operating expense as a percentage of revenue on a per day basis primarily reflects (i) a favorable impact of 0.4% from personnel expenses related to headcount reductions, operational efficiencies, and a positive leverage effect, mostly related to the increase in other revenue, partially offset by inflationary cost increases and increased incentive compensation expense and (ii) a positive leverage effect of 0.4% from facility expenses, which are largely fixed.

(3) The unfavorable impact in other expense, net and net income attributable to continuing noncontrolling interest of 0.2% was primarily related to higher insurance proceeds received for the year ended December 31, 2020.

Third Party Revenue .

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Year Ended December 31, Percentage Change in Revenue

Europe 2020 2019 Organic (1)

Acquisition and Divestiture (2)

Europe 2021 2020 Organic Acquisition and Divestiture (2)

Foreign Exchange (3)

Parts & services revenue $ 6,033,396 $ 5,470,159 6.2 % (1)

(0.4) % 4.6 % 10.3 %

Other revenue 28,552 22,025 24.1 % — % 5.5 % 29.6 %

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

(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 .

(1) Parts and services organic revenue for the year ended December 31, 2021 increased by 6.2% as the negative pandemic effect on volume in 2020 was more severe than in 2021.

Not all regions were impacted by the pandemic at the same time and to the same degree as in 2020, and the easing of lockdown measures has varied across the continent in 2021.

These conditions created a different growth profile for each of our European businesses.

While most of our businesses reported year over year growth, Central and Eastern Europe, the U.K.

and Benelux reported the largest incremental increases for the year ended December 31, 2021.

(2) Acquisition and divestiture related decline for the year ended December 31, 2021 was primarily as a result of the disposals of a non-core telecommunications operation in Germany in the second quarter of 2020 and five additional smaller disposals in 2021 and 2020.

(3) Compared to the prior year, exchange rates increased our revenue growth by $251 million, or 4.6%, primarily due to the weaker U.S.

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

dollar against the euro, pound sterling and Czech koruna for the year ended December 31, 2021 relative to the prior year period.

Segment EBITDA .

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

Segment EBITDA increased $190 million, or 44.5%, for the year ended December 31, 2021 compared to the prior year period.

Our Europe Segment EBITDA included a positive year over year impact of $20 million related to the translation of local currency results into U.S.

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.

dollars at higher exchange rates than those experienced for the year ended December 31, 2020.

On a constant currency basis (i.e., excluding the translation impact), Segment EBITDA increased by $170 million, or 39.8%, 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, 2021.

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

(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.

(1) The increase in gross margin was primarily attributable to a favorable impact of 1.4% as a result of net price increases implemented in response to inflationary pressures that are impacting product and freight costs and other margin improvement initiatives related to procurement.

Additionally, there was a 0.2% benefit from the disposal of non-core operations in 2020.

(2) The decrease in segment operating expenses as a percentage of revenue reflects favorable impacts of (i) 0.4% from bad debt expense due to customers' improved solvency and an increase in reserve in the prior year related to the COVID-19 pandemic, (ii) 0.3% from freight, vehicle and fuel expenses due to higher internet and mail order sales in the prior year, which have higher freight costs, and (iii) several individually immaterial factors that had a favorable impact of 0.3% in the aggregate.

These were partially offset by personnel costs that had an unfavorable impact of 0.2% compared to the prior year due to government grants received in the prior year to cover employee costs in countries such as the U.K.

and Germany (a lesser amount was received in 2021) and increased incentive compensation that was partially offset by a favorable leverage effect and headcount reductions.

Third Party Revenue .

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Specialty 2021 2020 Organic (1)

Acquisition and Divestiture Foreign Exchange Total Change

Acquisition and Divestiture (2)

Foreign Exchange Total Change

Parts & services revenue $ 1,863,917 $ 1,505,340 20.2 % 3.0 % 0.6 % 23.8 %

2 unchanged sentences

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

(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.

(1) Parts and services organic revenue increased 20.2% (21.1% on a per day basis) for the year ended December 31, 2021 compared to the prior year despite two fewer selling days .

The organic increase was primarily due to strong demand for our products across all channels of our business.

We believe the revenue growth was driven by our competitive advantage with our delivery service teams that enabled us to keep up with the strong demand and have more available inventory than our competitors.

(2) Acquisition related growth for 2021 reflected revenue from our acquisitions of four Specialty businesses since the beginning of 2020 through the one-year anniversary of the acquisition dates.

Segment EBITDA .

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

Segment EBITDA increased $60 million, or 37.2%, for the year ended December 31, 2021 compared to the prior year primarily due to increased revenue as noted above and expanded margin as discussed below.

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

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

(Decrease) increase due to:

Increase (decrease) due to:

Change in gross margin 0.9 % (1)

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

(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.

(1) The increase in gross margin primarily reflects lower discounting to recover increased input costs and, to a lesser extent, favorable product and channel mix.

(2) The decrease in segment operating expenses as a percentage of revenue reflects a favorable impact of (i) 0.3% in personnel costs, partially offset by (ii) an unfavorable impact of 0.2% due to increased incentive compensation.

Liquidity and Capital Resources

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

December 31, 2020 December 31, 2019

2021 2020 2019

Cash and cash equivalents $ 274,134 $ 312,154 $ 523,020

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1,468,234 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).

(2) Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of immaterial amounts as of both December 31, 2020 and December 31, 2019).

(3) Capacity under credit facilities includes our revolving credit facilities and our receivables securitization facility.

(1) Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of $12 million, $26 million, and $30 million as of December 31, 2021, 2020, and 2019, respectively).

(2) Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of immaterial amounts as of December 31, 2021, 2020, and 2019, respectively).

(3) Capacity under credit facilities includes our revolving credit facilities and our receivables securitization facility (through July 30, 2021, at which time the facility was terminated).

Availability under credit facilities is reduced by our outstanding letters of credit.

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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 our common stock.

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.

To fund our acquisitions, we have accessed various forms of debt financing, including revolving credit facilities, senior notes and a receivables securitization facility (terminated on July 30, 2021).

As of December 31, 2021, 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 ($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

• Senior secured credit facilities maturing in January 2024, composed of $3,150 million in revolving credit ( $1,887 million outstanding at December 31, 2021), bearing interest at variable rates, with availability reduced by $69 million of amounts outstanding under letters of credit

• Euro Notes (2024) totaling $569 million (€500 million), maturing in April 2024 and bearing interest at a 3.875% fixed rate

• Euro Notes (2026/28) totaling $1.2 billion (€1.0 billion), consisting of (i) €750 million maturing in April 2026 and bearing interest at a 3.625% fixed rate, and (ii) €250 million maturing in April 2028 and bearing interest at a 4.125% fixed rate

• Receivables securitization facility with availability up to $110 million (no outstanding balance as of December 31, 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.

• Euro Notes (2028) totaling $284 million (€250 million) maturing in April 2028 and bearing interest at a 4.125% fixed rate

As of December 31, 2021, we had approximately $1,194 million available under our credit facilities.

Combined with $274 million of cash and cash equivalents at December 31, 2021, we had approximately $1,468 million in available liquidity, a decrease of $1,390 million from our available liquidity as of December 31, 2020, as a result of the following activity .

On April 1, 2021, we redeemed the €750 million Euro Notes (2026) with proceeds from borrowings on our revolving credit facility and cash on hand, resulting in a decrease in available liquidity compared to December 31, 2020 .

Additionally, in the second quarter of 2021, we used free cash flow generated in our domestic operations and borrowings on our revolving credit facility to repay all of our term loan ($319 million).

Also, we terminated our $110 million receivables securitization facility effective July 30, 2021.

With these transactions, we reduced our overall liquidity by utilizing available capacity under the revolving credit facility and reducing the overall facility size.

We believe our future cash flow needs can be supported by a smaller credit facility, so we redeemed the Euro Notes (2026) and eliminated the term loan using funds from the revolving credit facility, which in turn will lower our interest expense and non-usage fees.

Since December 31, 2019, we have lowered the debt balance by $1,248 million.

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.

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

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, and we returned to our stated capital allocation strategy.

Our 2022 plan includes further spending to rebuild inventory levels, support growth driven capital projects, and complete strategic acquisitions.

Beginning in the fourth quarter of 2021, we expanded our capital allocation strategy to include the payment of dividends as an additional mechanism to return value to our stockholders.

On October 26, 2021, the Board of Directors of LKQ declared a cash dividend to stockholders.

The quarterly cash dividend of $0.25 per share of common stock was paid on December 2, 2021 to stockholders of record at the close of business on November 11, 2021, for an aggregate payout of $73 million, which is reflected as a financing cash outflow.

On February 15, 2022, our Board of Directors declared a quarterly cash dividend of $0.25 per share of common stock, payable on March 24, 2022, to stockholders of record at the close of business on March 3, 2022.

We believe that our future cash flow generation will permit us to continue paying dividends in future periods;

however, the timing, amount and frequency of such future dividends will be subject to approval by our Board of Directors, and based on considerations of capital availability, compliance with covenants in our credit facilities and senior note indentures, and various other factors, many of which are outside of our control.

Additionally, 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 or alter our capital allocation strategy.

With $1,468 million of total liquidity as of December 31, 2021 and $35 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, 2021):

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Minimum interest coverage ratio 3.00:1.00 28.2

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.

Our credit agreement contains customary covenants that impose limitations and conditions on our ability to enter into certain transactions.

The credit agreement also contains financial and affirmative covenants, including limitations on our net leverage ratio and a minimum interest coverage ratio.

We were in compliance with all restrictive covenants under our credit agreement as of December 31, 2021.

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, such as (i) our November 2018 amendment to our senior secured credit facility and (ii) the issuance of the €750 million senior notes due 2026 and €250 million senior notes due 2028 the "Euro Notes (2026/28)" in April 2018 related to the Stahlgruber acquisition.

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.

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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.

Given the long-term nature of our investment in Stahlgruber, combined with favorable interest rates, we decided to fund the acquisition primarily through long-term, fixed rate notes.

We believe this approach provides financial flexibility to execute our long-term growth strategy while maintaining availability under our revolver.

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

In 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.

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.

The initiative allows our suppliers to monetize their 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 2022.

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

F inancial 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.

In the future, if the

financial institutions did not continue to purchase receivables from our suppliers under the initiative, the participating vendors may 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.

In addition, we hold currency swaps that contain an interest rate swap component and a foreign currency forward contract component that, when combined with related intercompany financing arrangements, effectively convert variable rate U.S.

Borrowings under the credit agreement accrue interest at variable rates which are tied to various indices, 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.

As detailed in Note 9, "Long-Term Obligations" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, certain of the available interest rates were modified in November in connection with the phase out of LIBOR.

Borrowings in U.S.

dollars will continue to accrue interest at LIBOR until a replacement rate is specified, which is expected to occur prior to June 2023.

We do not expect the change in benchmark rates will have a material impact on our results of operations, financial position or liquidity.

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

In addition, from time to time, we hold currency swaps that contain an interest rate swap component and a foreign currency forward contract component that, when combined with related intercompany financing arrangements, effectively convert variable rate U.S.

dollar-denominated borrowings into fixed rate euro-denominated borrowings.

These derivative transactions are described in Note 10, "Derivative Instruments and Hedging Activities" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

After giving effect to these contracts, the weighted average interest rate on borrowings outstanding under our credit agreement at December 31, 2020 was 1.7%.

As of December 31, 2021, we did not have any of these types of contracts outstanding, and the weighted average interest rate on borrowings outstanding under our credit agreement was 1.1% at December 31, 2021.

Including our senior notes, our overall weighted average interest rate on borrowings was 2.0% at December 31, 2021.

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.

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 alternative rate of interest.

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).

Cash interest payments were $76 million for the year ended December 31, 2021, including interest payments on our Euro Notes (2024) and Euro Notes (2028) as well as the interest owed when we settled the Euro Notes (2026).

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

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)

(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).

Our credit agreement contains customary covenants that impose limitations and conditions on our ability to enter into certain transactions.

The credit agreement also contains financial and affirmative covenants, including limitations on our net leverage ratio and a minimum interest coverage ratio.

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

W e had outstanding credit agreement borrowings of $1,887 million and $967 million at December 31, 2021 and 2020, respectively.

Of these amounts, there were no current maturities as of December 31, 2021 and current maturities of $18 million at December 31, 2020.

As of December 31, 2021, the Company had cash and cash equivalents of $274 million , of which $211 million was held by foreign subsidiaries.

In general, it is our practice and intention to permanently reinvest the undistributed earnings of our foreign subsidiaries, and that position has not changed following the enactment of the Tax Act and the related imposition of the transition tax.

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

taxation, either as a result of the 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.

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

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.

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

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Total $ 6,387,500 $ 5,593,000 $ 6,445,800 $ 794,500

(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.

(1) Inventory purchases across the North America segment have increased for the year ended December 31, 2021 compared to the prior year period due to the low base as we scaled back buying in recognition of demand changes in 2020.

We are rebuilding our inventory levels after decreases in 2020 due to the COVID-19 pandemic, however, they did not reach our desired levels for the year ended December 31, 2021 due to ocean freight driven delays in shipping.

(2) The increase in inventory purchases in our Europe segment included an increase of $142 million attributable to the increase in the value of the euro, and to a lesser extent, the pound sterling for the year ended December 31, 2021 compared to the prior year period.

On a constant currency basis, inventory purchases increased compared to 2020, primarily due to the low base as we scaled back buying in recognition of demand changes in 2020.

However, we did not reach our desired levels for the year ended December 31, 2021 due to ocean freight driven delays in shipping.

(3) The increase in inventory purchases in the Specialty segment was primarily due to required restocking to keep up with the high demand for our products.

As shown in the table above, while inventory procurement increased for the year ended December 31, 2021 compared to December 31, 2020, procurement is still below pre-pandemic levels for the North America and Europe segments.

The following table sets forth a summary of our global wholesale salvage and self service procurement of vehicles for the years ended December 31, 2021, 2020 and 2019 (in thousands):

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Self service and "crush only" cars 542 574 591 (5.6) %

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):

Salvage purchases in 2021 increased relative to the prior year due to reduced buying in the prior year to reflect lower demand during the COVID-19 pandemic.

Self service vehicle purchases in 2021 declined due to (i) increased competition in the market due to high costs of precious metals and scrap steel and (ii) the elimination of underperforming locations in accordance with the 2020 Global Restructuring Program.

We expect to increase inventory purchases in 2022 to support the service and fill rate requirements of our businesses based on the revenue trend and expectations for full year 2022, including normal seasonality as supply chain challenges in 2021 deferred a portion of the inventory build to 2022 (although if supply chain challenges continue, our ability to increase inventory purchases to the desired level could be affected).

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

Operating Cash

Net cash provided by operating activities for the year ended December 31, 2020 $ 1,443,870

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Operating income 488,795 (1)

Non-cash depreciation and amortization expense

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

Cash paid for taxes

(174,656) (2)

Cash paid for interest

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

(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.

(2) Cash payments related to income taxes increased due to an increase in pretax income and the timing of estimated tax payments.

(3) Decrease in cash payments for interest is due to lower outstanding borrowings and the payoff of the Euro Notes (2026) in April 2021 with proceeds from lower interest rate debt.

(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.

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.

• Receivables, net was a $110 million greater outflow in 2021 primarily due to an increase in revenue for the year ended December 31, 2021 compared to the year ended December 31, 2020 , which translated to larger net outflows in the North America segment (of $25 million) and in the Europe segment (of $95 million).

We had a smaller cash outflow in the Specialty segment (of $10 million).

• Inventories represented $668 million in incremental cash outflows for the year ended December 31, 2021 compared to the same period of 2020.

The change is primarily attributable to increased inventory purchases in the current year as a result of recovering demand from prior year pandemic lows and strategic inventory purchases to curb the impacts of supply chain constraints.

• Accounts payable produced $347 million in highe r cash inflows primarily due to higher accounts payable balances in the North America segment (of $196 million) and in the Specialty segment (of $20 million) due to timing of payments, and in the Europe segment (of $131 million) co mpared to the prior year period, as a result of timing of payments and benefits from extended payment terms, including through our supply chain financing initiatives.

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

Net cash used in investing activities totaled $419 million and $166 million for the years ended December 31, 2021 and 2020, respectively.

Property, plant and equipment purchases were $293 million in 2021 compared to $173 million in the prior year.

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.

The increase in capital spending in 2021 is partially attributable to the low base as we scaled back asset purchases during the initial stages of the pandemic.

Additionally, we increased real estate purchases in 2021 to support our long-term strategic objectives in the salvage business.

We invested $124 million of cash, net of cash acquired, in business acquisitions during the year ended December 31, 2021 compared to $7 million during the year ended December 31, 2020.

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):

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Free cash flow $ 1,073,581 $ 1,271,175

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.

Net cash used in financing activities totaled $985 million and $1,513 million for the years ended December 31, 2021 and 2020, respectively.

During the year ended December 31, 2021, net borrowings totaled $85 million compared to net repayments of our borrowings of $1,365 million during the year ended December 31, 2020.

Repayments in 2021 and 2020 include the redemption of the €750 million Euro Notes (2026) and the $600 million U.S.

Notes, respectively.

We repurchased $877 million of our common stock in the year ended December 31, 2021 compared to $117 million in the year ended December 31, 2020.

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.

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.

Off-Balance Sheet Arrangements and Future Commitments

Except as described below, we do not have any off-balance sheet arrangements or undisclosed borrowings or debt that would be required to be disclosed pursuant to Item 303 of Regulation S-K under the Securities Exchange Act of 1934.

Additionally, we do not have any synthetic leases.

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

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.

See Note 13, "Leases" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on leases.

In December 2019, we modified the shares of a noncontrolling interest of a subsidiary acquired in connection with the Stahlgruber acquisition and issued new redeemable shares to the minority shareholder.

The new redeemable shares contain a put option for all noncontrolling interest shares at a fixed price of $24 million (€21 million) for the minority shareholder exercisable in the fourth quarter of 2023.

The put option is outside the control of the Company to exercise.

See "Stockholders'

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

The following table represents our future commitments under contractual obligations as of December 31, 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.

The long-term debt balance excludes debt issuance costs, as these expenses have already been paid.

Interest on our senior notes, notes payable, and other long-term debt is calculated based on the respective stated rates.

Interest on our variable rate credit facilities is calculated based on the weighted average rates, including the impact of interest rate swaps through their respective expiration dates, in effect for each tranche of borrowings as of December 31, 2020.

Future estimated interest expense for the next year, one to three years, and three to five years is $94 million, $185 million and $100 million, respectively.

Estimated interest expense beyond five years is $57 million.

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

Future estimated interest expense for the next year, one to three years, and three to five years is $1 million, $1 million and $1 million, respectively.

Estimated interest expense beyond five years is $9 million.

(3) The operating lease payments above do not include certain tax, insurance and maintenance costs, which are also required contractual obligations under our operating leases but are generally not fixed and can fluctuate from year to year.

Also, we have excluded future minimum lease payments for leases that have been signed but have not commenced as of December 31, 2020.

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

(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.

As of December 31, 2020, the projected benefit obligation for our defined benefit pension plans was $212 million , and the fair value of the related plan assets was $59 million .

Total expected contributions to our pension plans, including amounts that we expect to pay in benefits directly to participants, are $4 million for the year ended December 31, 2021.

In 2021, we settled our cross currency swap and other foreign exchange forward contracts with the counterparties for $89 million due primarily to strengthening in the Euro exchange rate relative to the contract rates.

We also paid $73 million in dividends to our stockholders during the year ended December 31, 2021 (no dividends were paid in 2020).

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 and costs.

We have various contractual obligations and commitments arising in the normal course of business.

The following represent our anticipated material cash requirements from known contractual and other obligations as of December 31, 2021.

• Long-term debt of $2,824 million and related interest totaling $176 million, of which $35 million and $59 million, respectively is expected to be paid within twelve months.

See Note 9, "Long-Term Obligations" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for more information related to debt amounts outstanding at December 31, 2021.

• Operating lease payments of $1,861 million, of which $293 million is expected to be paid within twelve months.

See Note 12, "Leases" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for more information related to lease amounts outstanding at December 31, 2021.

• Purchase obligations of $915 million for open purchase orders for aftermarket inventory all expected to be paid within twelve months.

• Net pension obligations of $131 million, of which $5 million is expected to be paid within twelve months.

Benefit payments for our funded plans will be made from plan assets, whereas benefit payments for our unfunded plans are made from cash flows from operating activities.

See Note 14, "Employee Benefit Plans" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information related to our pension plans, including information related to expected benefit payments for the next 10 years and the plan assets available to satisfy those benefit payments.

See Note 13, "Employee Benefit Plans" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for more information related to net pension obligations at December 31, 2021.

• Self-insurance reserves of $117 million, of which $61 million is expected to be paid within twelve months.

See Note 3, "Summary of Significant Accounting Policies" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for more information relates to self-insurance reserves at December 31, 2021.

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