LKQ CORP 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ***** INDEX TO FINANCIAL STATEMENTS Page LKQ CORPORATION AND SUBSIDIARIES Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 59 Consolidated Statements of Income for the years ended December 31, 202 1 , 20 20 and 201 9 62 Consolidated Statements of Comprehensive Income for the years ended December 31, 202 1 , 20 20 and 201 9 63 Consolidated Balance Sheets as of December 31, 202 1 and 20 20 64 Consolidated Statements of Cash Flows for the years ended December 31, 202 1 , 20 20 and 201 9 65 Consolidated Statements of Stockholders' Equity for the years ended December 31, 202 1 , 20 20 and 201 9 67 Notes to Consolidated Financial Statements 68 58 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of LKQ Corporation: Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of LKQ Corporation and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for each of the three years in the period ended December 31, 2021, and the related notes and the financial statement schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2022 , expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Goodwill Impairment Assessment – Refer to Note 3 to the financial statements. Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using a discounted cash flow model and the market approach, which require management to make significant estimates and assumptions. The goodwill balance subject to the impairment assessments was $4.5 billion as of December 31, 2021, and is allocated to four reporting units. Auditing the estimates and assumptions that impacted the valuation of certain reporting units involved especially subjective judgment; specifically, the forecasts of future revenue and profit margins (“forecasts”), the selection of discount rates, and the determination of market multiples. 59 How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the forecasts, the selection of discount rates, and determination of market multiples included the following, among others: ◦ We tested the effectiveness of controls over the goodwill impairment assessments, including those over the forecasts and the selection of the discount rates and market multiples. ◦ We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts. ◦ We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, (3) analyst and industry reports of the Company and companies in its peer group, and (4) forecasts used in the preceding impairment assessments. ◦ With the assistance of our fair value specialists, we evaluated the discount rates, including (1) testing the underlying source information and the mathematical accuracy of the calculations, (2) developing a range of independent estimates and comparing those to the discount rates used by management, and (3) comparing the discount rates used by management to those used in the preceding impairment assessments. ◦ With the assistance of our fair value specialists, we evaluated the market multiples, including testing the underlying source information and mathematical accuracy of the calculations, and comparing the multiples selected by management to its guideline public companies and the multiples used in the preceding impairment assessments. /s/ DELOITTE & TOUCHE LLP Chicago, Illinois February 25, 2022 We have served as the Company's auditor since 1998. 60 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of LKQ Corporation: Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of LKQ Corporation and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated February 25, 2022, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America ("generally accepted accounting principles"). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP Chicago, Illinois February 25, 2022 61 LKQ CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (In thousands, except per share data) Year Ended December 31, 2021 2020 2019 Revenue $ 13,088,504 $ 11,628,830 $ 12,506,109 Cost of goods sold 7,766,069 7,035,559 7,654,315 Gross margin 5,322,435 4,593,271 4,851,794 Selling, general and administrative expenses 3,567,732 3,266,065 3,580,300 Restructuring and acquisition related expenses 20,311 66,163 36,979 Loss on disposal of businesses and impairment of net assets held for sale 28 3,174 47,102 Depreciation and amortization 259,992 272,292 290,770 Operating income 1,474,372 985,577 896,643 Other expense (income): Interest expense 72,078 103,784 138,504 Loss (gain) on debt extinguishment 23,564 12,751 ( 128 ) Interest income and other income, net ( 20,400 ) ( 15,953 ) ( 32,755 ) Total other expense, net 75,242 100,582 105,621 Income from continuing operations before provision for income taxes 1,399,130 884,995 791,022 Provision for income taxes 330,591 249,498 215,330 Equity in earnings (losses) of unconsolidated subsidiaries 22,937 5,012 ( 32,277 ) Income from continuing operations 1,091,476 640,509 543,415 Net income (loss) from discontinued operations 648 ( 95 ) 1,619 Net income 1,092,124 640,414 545,034 Less: net income attributable to continuing noncontrolling interest 1,251 1,888 2,800 Less: net income attributable to discontinued noncontrolling interest — 103 974 Net income attributable to LKQ stockholders $ 1,090,873 $ 638,423 $ 541,260 Basic earnings per share: (1) Income from continuing operations $ 3.68 $ 2.10 $ 1.75 Net income (loss) from discontinued operations 0.00 ( 0.00 ) 0.01 Net income 3.68 2.10 1.76 Less: net income attributable to continuing noncontrolling interest 0.00 0.01 0.01 Less: net income attributable to discontinued noncontrolling interest — 0.00 0.00 Net income attributable to LKQ stockholders $ 3.68 $ 2.10 $ 1.75 Diluted earnings per share: (1) Income from continuing operations $ 3.67 $ 2.10 $ 1.75 Net income (loss) from discontinued operations 0.00 ( 0.00 ) 0.01 Net income 3.67 2.10 1.75 Less: net income attributable to continuing noncontrolling interest 0.00 0.01 0.01 Less: net income attributable to discontinued noncontrolling interest — 0.00 0.00 Net income attributable to LKQ stockholders $ 3.66 $ 2.09 $ 1.74 (1) The sum of the individual earnings per share amounts may not equal the total due to rounding. The accompanying notes are an integral part of the Consolidated Financial Statements. 62 LKQ CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (In thousands) Year Ended December 31, 2021 2020 2019 Net income $ 1,092,124 $ 640,414 $ 545,034 Less: net income attributable to continuing noncontrolling interest 1,251 1,888 2,800 Less: net income attributable to discontinued noncontrolling interest — 103 974 Net income attributable to LKQ stockholders 1,090,873 638,423 541,260 Other comprehensive income (loss): Foreign currency translation, net of tax ( 63,465 ) 113,767 6,704 Net change in unrealized gains/losses on cash flow hedges, net of tax 962 ( 6,326 ) ( 9,016 ) Net change in unrealized gains/losses on pension plans, net of tax 8,811 ( 1,033 ) ( 23,859 ) Other comprehensive (loss) income from unconsolidated subsidiaries ( 429 ) ( 4,532 ) 236 Other comprehensive (loss) income ( 54,121 ) 101,876 ( 25,935 ) Comprehensive income 1,038,003 742,290 519,099 Less: comprehensive income attributable to continuing noncontrolling interest 1,251 1,888 2,800 Less: comprehensive income attributable to discontinued noncontrolling interest — 103 974 Comprehensive income attributable to LKQ stockholders $ 1,036,752 $ 740,299 $ 515,325 The accompanying notes are an integral part of the Consolidated Financial Statements. 63 LKQ CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except per share data) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 274,134 $ 312,154 Receivables, net 1,072,772 1,073,389 Inventories 2,610,515 2,414,612 Prepaid expenses and other current assets 296,947 233,877 Total current assets 4,254,368 4,034,032 Property, plant and equipment, net 1,298,740 1,248,703 Operating lease assets, net 1,361,324 1,353,124 Goodwill 4,539,896 4,591,569 Other intangibles, net 746,149 814,219 Equity method investments 180,705 155,224 Other noncurrent assets 224,972 163,662 Total assets $ 12,606,154 $ 12,360,533 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,176,015 $ 932,406 Accrued expenses: Accrued payroll-related liabilities 260,827 208,718 Refund liability 106,800 102,148 Other accrued expenses 271,406 334,890 Other current liabilities 112,538 130,021 Current portion of operating lease liabilities 203,108 221,811 Current portion of long-term obligations 34,752 58,497 Total current liabilities 2,165,446 1,988,491 Long-term operating lease liabilities, excluding current portion 1,209,218 1,197,963 Long-term obligations, excluding current portion 2,777,160 2,812,641 Deferred income taxes 279,296 291,421 Other noncurrent liabilities 364,373 374,640 Commitments and contingencies Redeemable noncontrolling interest 24,077 24,077 Stockholders' equity: Common stock, $0.01 par value, 1,000,000 shares authorized, 321,578 shares issued and 287,015 shares outstanding at December 31, 2021; 320,868 shares issued and 303,553 shares outstanding at December 31, 2020 3,215 3,208 Additional paid-in capital 1,474,093 1,444,584 Retained earnings 5,793,515 4,776,040 Accumulated other comprehensive loss ( 153,130 ) ( 99,009 ) Treasury stock, at cost; 34,563 shares at December 31, 2021 and 17,315 shares at December 31, 2020 ( 1,345,949 ) ( 469,105 ) Total Company stockholders' equity 5,771,744 5,655,718 Noncontrolling interest 14,840 15,582 Total stockholders' equity 5,786,584 5,671,300 Total liabilities and stockholders' equity $ 12,606,154 $ 12,360,533 The accompanying notes are an integral part of the Consolidated Financial Statements. 64 LKQ CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,092,124 $ 640,414 $ 545,034 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 284,003 299,497 314,406 Impairment of equity method investments — — 41,057 Loss on disposal of businesses and impairment of net assets held for sale 28 3,174 47,102 Stock-based compensation expense 33,736 29,078 27,695 Loss (gain) on debt extinguishment 23,564 12,751 ( 128 ) Deferred income taxes ( 27,079 ) ( 33,827 ) 7,109 Other ( 36,610 ) ( 3,934 ) ( 16,183 ) Changes in operating assets and liabilities, net of effects from acquisitions and dispositions: Receivables, net ( 16,234 ) 93,588 26,419 Inventories ( 234,514 ) 433,072 15,460 Prepaid income taxes/income taxes payable ( 65,051 ) 34,945 25,776 Accounts payable 283,185 ( 64,032 ) 3,712 Other operating assets and liabilities 29,895 ( 856 ) 26,574 Net cash provided by operating activities 1,367,047 1,443,870 1,064,033 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ( 293,466 ) ( 172,695 ) ( 265,730 ) Proceeds from disposals of property, plant and equipment 19,565 16,750 16,045 Acquisitions, net of cash acquired ( 123,898 ) ( 7,363 ) ( 27,296 ) Other investing activities, net ( 20,959 ) ( 2,579 ) 12,128 Net cash used in investing activities ( 418,758 ) ( 165,887 ) ( 264,853 ) CASH FLOWS FROM FINANCING ACTIVITIES: Early-redemption premium ( 16,014 ) ( 9,498 ) — Repayment of Euro Notes (2026) ( 883,275 ) — — Repayment of U.S. Notes (2023) — ( 600,000 ) — Borrowings under revolving credit facilities 5,034,867 841,485 605,708 Repayments under revolving credit facilities ( 3,716,955 ) ( 1,472,920 ) ( 734,471 ) Repayments under term loans ( 323,750 ) ( 17,500 ) ( 8,750 ) Borrowings under receivables securitization facility — 111,300 36,600 Repayments under receivables securitization facility — ( 111,300 ) ( 146,600 ) Repayments of other debt, net ( 25,587 ) ( 115,609 ) ( 53,045 ) Settlement of derivative instruments, net ( 88,743 ) — — Dividends paid to LKQ stockholders ( 72,873 ) — — Purchase of treasury stock ( 876,844 ) ( 117,292 ) ( 291,813 ) Other financing activities, net ( 15,961 ) ( 21,217 ) ( 8,298 ) Net cash used in financing activities ( 985,135 ) ( 1,512,551 ) ( 600,669 ) The accompanying notes are an integral part of the Consolidated Financial Statements. 65 LKQ CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2021 2020 2019 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 1,174 ) 11,865 ( 904 ) Net (decrease) increase in cash, cash equivalents and restricted cash ( 38,020 ) ( 222,703 ) 197,607 Cash, cash equivalents and restricted cash of continuing operations, beginning of period 312,154 528,387 337,250 Add: Cash, cash equivalents and restricted cash of discontinued operations, beginning of period — 6,470 — Cash, cash equivalents and restricted cash of continuing and discontinued operations, beginning of period 312,154 534,857 337,250 Cash, cash equivalents and restricted cash of continuing and discontinued operations, end of period 274,134 312,154 534,857 Less: Cash and cash equivalents of discontinued operations, end of period — — 6,470 Cash, cash equivalents and restricted cash, end of period $ 274,134 $ 312,154 $ 528,387 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 274,134 $ 312,154 $ 523,020 Restricted cash — — 5,367 Cash, cash equivalents and restricted cash, end of period $ 274,134 $ 312,154 $ 528,387 Supplemental disclosure of cash paid for: Income taxes, net of refunds $ 422,739 $ 248,083 $ 181,306 Interest 75,632 106,866 143,121 Supplemental disclosure of noncash investing and financing activities: Noncash property, plant and equipment and software intangible additions in accounts payable and other accrued expenses 14,173 18,841 10,154 Notes payable and other financing obligations, including notes issued, debt assumed and settlement of pre-existing balances in connection with business acquisitions and disposals 6,892 4,316 47,887 Notes receivable and contingent consideration receivable acquired in connection with disposal of businesses — 8,990 — Trade and note receivables forgiven and assets held for sale sold with purchase of noncontrolling interest — 6,079 — Notes issued in connection with purchase of noncontrolling interest — — 14,196 Contingent consideration liabilities 14,758 3,045 6,627 The accompanying notes are an integral part of the Consolidated Financial Statements. 66 LKQ CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (In thousands, except per share data) LKQ Stockholders Common Stock Treasury Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Noncontrolling Interest Total Stockholders' Equity Shares Amount Shares Amount Balance as of January 1, 2019 318,418 $ 3,184 ( 2,272 ) $ ( 60,000 ) $ 1,415,188 $ 3,598,876 $ ( 174,950 ) $ 56,454 $ 4,838,752 Net income — — — — — 541,260 — 3,774 545,034 Other comprehensive loss — — — — — — ( 25,935 ) — ( 25,935 ) Purchase of treasury stock — — ( 10,924 ) ( 291,813 ) — — — — ( 291,813 ) Vesting of restricted stock units, net of shares withheld for employee tax 719 7 — — ( 2,091 ) — — — ( 2,084 ) Stock-based compensation expense — — — — 27,695 — — — 27,695 Exercise of stock options 927 9 — — 9,046 — — — 9,055 Tax withholdings related to net share settlements of stock-based compensation awards ( 137 ) ( 1 ) — — ( 4,494 ) — — — ( 4,495 ) Capital contributions from, net of dividends declared to, noncontrolling interest shareholder — — — — — — — ( 8,474 ) ( 8,474 ) Acquired noncontrolling interest (see Note 2) — — — — — — — 10,365 10,365 Purchase and modification of noncontrolling interests (see Note 3) — — — — ( 27,105 ) — — ( 22,415 ) ( 49,520 ) Balance as of December 31, 2019 319,927 $ 3,199 ( 13,196 ) $ ( 351,813 ) $ 1,418,239 $ 4,140,136 $ ( 200,885 ) $ 39,704 $ 5,048,580 Net income — — — — — 638,423 — 1,991 640,414 Other comprehensive income — — — — — — 101,876 — 101,876 Purchase of treasury stock — — ( 4,119 ) ( 117,292 ) — — — — ( 117,292 ) Vesting of restricted stock units, net of shares withheld for employee tax 829 8 — — ( 3,063 ) — — — ( 3,055 ) Stock-based compensation expense — — — — 29,078 — — — 29,078 Exercise of stock options 112 1 — — 1,466 — — — 1,467 Capital contributions from, net of dividends declared to, noncontrolling interest shareholder — — — — — — — ( 3,757 ) ( 3,757 ) Adoption of ASU 2016-13 (see Note 3) — — — — — ( 2,519 ) — — ( 2,519 ) Disposition of subsidiary with noncontrolling interests (see Note 2) — — — — — — — ( 11,404 ) ( 11,404 ) Purchase of noncontrolling interests (see Note 3) — — — — ( 1,136 ) — — ( 10,952 ) ( 12,088 ) Balance as of December 31, 2020 320,868 $ 3,208 ( 17,315 ) $ ( 469,105 ) $ 1,444,584 $ 4,776,040 $ ( 99,009 ) $ 15,582 $ 5,671,300 Net income — — — — — 1,090,873 — 1,251 1,092,124 Other comprehensive loss — — — — — — ( 54,121 ) — ( 54,121 ) Purchase of treasury stock — — ( 17,248 ) ( 876,844 ) — — — — ( 876,844 ) Vesting of restricted stock units, net of shares withheld for employee tax 710 7 — — ( 4,227 ) — — — ( 4,220 ) Stock-based compensation expense — — — — 33,736 — — — 33,736 Dividends declared to LKQ stockholders ($0.25 per share) — — — — — ( 73,398 ) — — ( 73,398 ) Capital contributions from, net of dividends declared to, noncontrolling interest shareholder — — — — — — — ( 1,576 ) ( 1,576 ) Disposition of subsidiary with noncontrolling interests — — — — — — — ( 222 ) ( 222 ) Foreign currency translation adjustment on noncontrolling interest — — — — — — — ( 195 ) ( 195 ) Balance as of December 31, 2021 321,578 $ 3,215 ( 34,563 ) $ ( 1,345,949 ) $ 1,474,093 $ 5,793,515 $ ( 153,130 ) $ 14,840 $ 5,786,584 The accompanying notes are an integral part of the Consolidated Financial Statements. 67 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Business Description of Business LKQ Corporation, a Delaware corporation, is a holding company and all operations are conducted by subsidiaries. When the terms "LKQ," "the Company," "we," "us," or "our" are used in this document, those terms refer to LKQ Corporation and its consolidated subsidiaries. We are a global distributor of vehicle products, including replacement parts, components, and systems used in the repair and maintenance of vehicles, and specialty vehicle aftermarket products and accessories designed to improve the performance, functionality and appearance of vehicles. We operate in the United States, Canada, Germany, the United Kingdom, the Benelux region (Belgium, Netherlands, and Luxembourg), Italy, Czech Republic, Austria, Slovakia, Poland, and various other European countries. We are organized into four operating segments: Wholesale - North America, Europe, Specialty, and Self Service. We aggregate our Wholesale - North America and Self Service operating segments into one reportable segment, North America, resulting in three reportable segments: North America, Europe and Specialty. Basis of Presentation The Consolidated Financial Statements have been prepared in conformity with US GAAP and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Note 2. Discontinued Operations Czech Republic 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. Prior to closing, on May 3, 2018, the European Commission cleared the acquisition of Stahlgruber for the entire European Union, except with respect to the wholesale automotive parts business in the Czech Republic. The acquisition of Stahlgruber’s Czech Republic wholesale business was referred to the Czech Republic competition authority for review. On May 10, 2019, the Czech Republic competition authority approved our acquisition of Stahlgruber’s Czech Republic wholesale business subject to the requirement that it divest certain of the acquired locations. We acquired Stahlgruber’s Czech Republic wholesale business on May 29, 2019 and decided to divest all of the acquired locations. We immediately classified the business as discontinued operations because the business was never integrated into our Europe segment. We completed the sale of Stahlgruber's Czech Republic business on February 28, 2020, resulting in an immaterial loss on sale (presented in Net income (loss) from discontinued operations in the Consolidated Statements of Income). As part of the transaction, we purchased the 48.2 % noncontrolling interest from the minority shareholder for a purchase price of € 8 million, which included the issuance of € 4 million of notes payable, and then immediately thereafter sold 100 % of the business for a purchase price of € 14 million, which included € 7 million of notes receivable. This transaction resulted in a disposition of noncontrolling interest of $ 11 million. From January 1, 2020 through the date of sale, we recorded an immaterial amount of net income (excluding the loss on sale) from discontinued operations related to the business, of which an immaterial amount was attributable to the noncontrolling interest. Glass Manufacturing Business On March 1, 2017, LKQ completed the sale of the glass manufacturing business PGW to a subsidiary of Vitro S.A.B. de C.V. ("Vitro"). In connection with the sale, LKQ and Vitro entered into a twelve month Transition Services Agreement commencing on the transaction date with two six-month renewal periods, a three-year Purchase and Supply Agreement, and an Intellectual Property Agreement. The Purchase and Supply Agreement expired in the first quarter of 2020, while the Intellectual Property Agreement has a perpetual term; as of December 31, 2019, the Transition Services Agreement had expired. Pursuant to the Purchase and Supply Agreement, our aftermarket automotive glass distribution business agreed to source various products from Vitro's glass manufacturing business annually for a three-year period beginning on March 1, 2017. All purchases from Vitro, including those outside of the Purchase and Supply Agreement, for the two months ended February 29, 2020 and the year ended December 31, 2019, were $ 4 million and $ 30 million, respectively. 68 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2021, 2020 and 2019, our net results from discontinued operations were insignificant. The net results included the settlement of certain tax matters with Vitro, reserves related to a pre-disposition matter and reassessment of a previously recorded valuation allowance on a deferred tax asset balance. Note 3. Summary of Significant Accounting Policies Principles of Consolidation The accompanying Consolidated Financial Statements include the accounts of LKQ Corporation and its subsidiaries. All intercompany transactions and accounts have been eliminated. Use of Estimates The preparation of the Consolidated Financial Statements in accordance with US GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reported periods. We base our estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances including management’s current assumptions with respect to implications of the COVID-19 pandemic, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and outcomes could differ from those estimates. Revenue Recognition See Note 4, "Revenue Recognition" for our accounting policies related to revenue. Cost of Goods Sold Cost of goods sold includes: the price we pay for inventory, net of vendor discounts, rebates or other incentives; inbound freight and other transportation costs to bring inventory into our facilities; and overhead costs related to purchasing, warehousing and transporting our products from our distribution warehouses to our selling locations. For our salvage, remanufactured, and refurbished products, cost of goods sold also includes direct and indirect labor, equipment costs, depreciation, and other overhead to transform inventory into finished products suitable for sale. Cost of goods sold also includes expenses for service-type warranties and for assurance-type warranty programs. See Note 4, "Revenue Recognition" for additional information related to our warranty programs. Selling, General and Administrative Expenses Selling, general and administrative expenses include: personnel costs for employees in selling, general and administrative functions; costs to operate branch locations, corporate offices and back office support centers; costs to transport products from facilities to our customers; and other selling, general and administrative expenses, such as professional fees, supplies, and advertising expenses. The costs included in Selling, general and administrative expenses do not relate to inventory processing or conversion activities, and, as such, are classified below the gross margin line in the Consolidated Statements of Income. Cash, Cash Equivalents and Restricted Cash Cash and cash equivalents include cash on hand, operating accounts, and deposits readily convertible to known amounts of cash. Restricted cash includes cash for which our ability to withdraw funds at any time is contractually limited. As of December 31, 2021 and 2020 we had no restricted cash balance in Other noncurrent assets on the Consolidated Balance Sheets. 69 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Allowance for Credit Losses Receivables, net are reported net of an allowance for credit losses. During the first quarter of 2020, we adopted ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement o f Credit Losses on Financial Instruments" ("ASU 2016-13"). Prior to the adoption of ASU 2016-13, Receivables, net were reported net of an allowance for doubtful accounts. Management evaluates the aging of customer receivable balances, the financial condition of our customers, historical trends, and macroeconomic factors to estimate the amount of customer receivables that may not be collected in the future and records a provision it believes is appropriate. Our reserve for expected lifetime credit losses was $ 53 million and $ 70 million at December 31, 2021 and 2020, respectively. The provision for credit losses was a benefit of $ 5 million, and expense of $ 25 million and $ 12 million for the years ended December 31, 2021, 2020 and 2019, respectivel y. The benefit in the provision for credit losses for the year ended December 31, 2021 is attributable primarily to the recovery of the global economy from the effects of the COVID-19 pandemic. A roll-forward of our allowance for credit losses is as follows (in thousands): Allowance for Credit Losses Balance as of January 1, 2020 $ 52,685 Adjustment for adoption of new standard 2,519 Provision for credit losses 24,686 Write-offs ( 14,024 ) Impact of foreign currency 4,065 Balance as of December 31, 2020 69,931 Provision for credit losses ( 4,798 ) Write-offs ( 8,376 ) Impact of foreign currency ( 3,267 ) Balance as of December 31, 2021 $ 53,490 Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. We control our exposure to credit risk associated with these instruments by (i) placing cash and cash equivalents with several major financial institutions; (ii) holding high-quality financial instruments; and (iii) maintaining strict policies over credit extension that include credit evaluations, credit limits and monitoring procedures. In addition, our overall credit risk with respect to accounts receivable is limited to some extent because our customer base is composed of a large number of geographically diverse customers. Inventories Our inventory is classified into the following categories: (i) aftermarket and refurbished products, (ii) salvage and remanufactured products, and (iii) manufactured products. An aftermarket product is a new vehicle product manufactured by a company other than the original equipment manufacturer. For the aftermarket products, excluding aftermarket automotive glass products, cost is established based on the average price paid for parts; for the aftermarket automotive glass products, cost is established using the first-in first-out method. Inventory cost for aftermarket products includes expenses incurred for freight in and overhead costs; for items purchased from foreign companies, import fees and duties and transportation insurance are also included. Refurbished products are parts that require cosmetic repairs, such as wheels, bumper covers and lights; LKQ will apply new parts, products or materials to these parts in order to produce the finished product. Refurbished inventory cost is based upon the average price we pay for cores, which are recycled automotive parts that are not suitable for sale as a replacement part without further processing. The cost of refurbished inventory also includes expenses incurred for freight in, labor and other overhead costs. A salvage product is a recycled vehicle part suitable for sale as a replacement part. Cost is established based upon the price we pay for a vehicle, including auction, storage and towing fees, as well as expenditures for buying and dismantling the vehicle. Inventory carrying value is determined using the average cost to sales percentage at each of our facilities and applying that percentage to the facility's inventory at expected selling prices, the assessment of which incorporates the sales probability based on a part's number of days in stock and historical demand. The average cost to sales percentage is derived from each facility's 70 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS historical profitability for salvage vehicles. Remanufactured products are used parts that have been inspected, rebuilt, or reconditioned to restore functionality and performance, such as remanufactured engines and transmissions. Remanufactured inventory cost is based upon the price paid for cores and expenses incurred for freight in, direct manufacturing costs and other overhead costs. A manufactured product is a new vehicle product. Manufactured product inventory can be a raw material, work-in-process or finished good. Cost is established using the first-in first-out method. For all inventory, carrying value is recorded at the lower of cost or net realizable value. Net realizable value can be influenced by current anticipated demand. If actual demand is lower than our estimates, additional reductions to inventory carrying value would be necessary in the period such determination is made. Inventories consist of the following (in thousands): December 31, 2021 2020 Aftermarket and refurbished products $ 2,167,732 $ 2,025,002 Salvage and remanufactured products 405,776 368,815 Manufactured products 37,007 20,795 Total inventories $ 2,610,515 $ 2,414,612 Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of December 31, 2021, manufactured products inventory was composed of $ 27 million of raw materials, $ 4 million of work in process, and $ 5 million of finished goods. As of December 31, 2020, manufactured products inventory was composed of $ 16 million of raw materials, $ 3 million of work in process, and $ 2 million of finished goods. Property, Plant and Equipment Property, plant and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and improvements that extend the useful life of the related asset are capitalized. As property, plant and equipment are sold or retired, the applicable cost and accumulated depreciation are removed from the accounts and any resulting gain or loss thereon is recognized. Construction in progress consists primarily of building and land improvements at our existing facilities. Depreciation is calculated using the straight-line method over the estimated useful lives or, in the case of leasehold improvements, the term of the related lease and reasonably assured renewal periods, if shorter. The estimated useful lives are as follows: Useful Life Land improvements 10 - 20 years Buildings and improvements 20 - 40 years Machinery and equipment 3 - 20 years Computer equipment and software 3 - 10 years Vehicles and trailers 3 - 10 years Furniture and fixtures 5 - 7 years Leasehold improvements 1 - 20 years 71 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property, plant and equipment consists of the following (in thousands): December 31, 2021 2020 Land and improvements $ 204,311 $ 200,955 Buildings and improvements 415,473 415,810 Machinery and equipment 738,962 707,674 Computer equipment and software 114,573 121,859 Vehicles and trailers 144,924 149,922 Furniture and fixtures 57,755 57,082 Leasehold improvements 349,980 314,567 Finance lease assets 101,026 99,061 2,127,004 2,066,930 Less—Accumulated depreciation ( 987,481 ) ( 895,149 ) Construction in progress 159,217 76,922 Total property, plant and equipment, net $ 1,298,740 $ 1,248,703 Depreciation expense associated with refurbishing, remanufacturing, manufacturing and furnace operations as well as distribution centers are recorded in Cost of goods sold in the Consolidated Statements of Income. Depreciation expense resulting from restructuring programs is recorded in Restructuring and acquisition related expenses. All other depreciation expense is reported in Depreciation and amortization. Total depreciation expense for the years ended December 31, 2021, 2020, and 2019 was $ 180 million , $ 180 million, and $ 174 million, respectively. Intangible Assets Intangible assets consist primarily of goodwill (the cost of purchased businesses in excess of the fair value of the identifiable net assets acquired) and other specifically identifiable intangible assets, such as trade names, trademarks, customer and supplier relationships, software and other technology related assets, and covenants not to compete. Goodwill is tested for impairment at least annually. We performed annual impairment tests during the fourth quarters of 2021, 2020 and 2019. Goodwill impairment testing may also be performed on an interim basis when events or circumstances arise that may lead to impairment. The fair value estimates of our reporting units were established using weightings of the results of a discounted cash flow methodology and a comparative market multiples approach. Based on the annual goodwill impairment test performed in the fourth quarter of 2021, we determined no impairment existed as all of the reporting units had a fair value estimate which exceeded the carrying value by at least 70 % . The changes in the carrying amount of goodwill by reportable segment are as follows (in thousands): North America Europe Specialty Total Balance as of January 1, 2020 $ 1,718,044 $ 2,280,901 $ 407,590 $ 4,406,535 Business acquisitions and adjustments to previously recorded goodwill ( 123 ) 419 5,291 5,587 Exchange rate effects 2,346 176,915 186 179,447 Balance as of December 31, 2020 $ 1,720,267 $ 2,458,235 $ 413,067 $ 4,591,569 Business acquisitions and adjustments to previously recorded goodwill 23,410 17,969 43,313 84,692 Reclassified to net assets held for sale — ( 269 ) — ( 269 ) Disposal of business — ( 479 ) — ( 479 ) Exchange rate effects 893 ( 136,353 ) ( 157 ) ( 135,617 ) Balance as of December 31, 2021 $ 1,744,570 $ 2,339,103 $ 456,223 $ 4,539,896 Accumulated impairment losses as of December 31, 2021 $ ( 33,244 ) $ — $ — $ ( 33,244 ) 72 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of other intangibles, net are as follows (in thousands): December 31, 2021 December 31, 2020 Intangible assets subject to amortization $ 664,849 $ 732,919 Indefinite-lived intangible assets Trademarks 81,300 81,300 Total $ 746,149 $ 814,219 The components of intangible assets subject to amortization are as follows (in thousands): December 31, 2021 December 31, 2020 Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net Trade names and trademarks $ 514,231 $ ( 174,785 ) $ 339,446 $ 519,577 $ ( 152,668 ) $ 366,909 Customer and supplier relationships 603,621 ( 424,577 ) 179,044 617,952 ( 405,237 ) 212,715 Software and other technology related assets 345,122 ( 199,083 ) 146,039 326,988 ( 174,513 ) 152,475 Covenants not to compete 12,950 ( 12,630 ) 320 13,700 ( 12,880 ) 820 Total $ 1,475,924 $ ( 811,075 ) $ 664,849 $ 1,478,217 $ ( 745,298 ) $ 732,919 E stimated useful lives for the finite-lived intangible assets are as follows: Method of Amortization Useful Life Trade names and trademarks Straight-line 4-30 years Customer and supplier relationships Accelerated 3-20 years Software and other technology related assets Straight-line 3-15 years Covenants not to compete Straight-line 2-5 years Amortization expense for intangibles was $ 104 million, $ 119 million, and $ 140 million during the years ended December 31, 2021, 2020, and 2019, respectively. Estimated amortization expense for each of the five years in the period ending December 31, 2026 is $ 97 million, $ 85 million, $ 73 million, $ 65 million and $ 58 million, respectively. Leases See Note 12, "Leases" for our accounting policies related to leases. Net Assets Held for Sale During 2021, we had immaterial impairment charges on net assets held for sale. During 2019 and 2020, we committed to plans to sell certain businesses in the North America and Europe segments. As a result, these businesses were classified as net assets held for sale and were required to be adjusted to the lower of fair value less cost to sell or carrying value, resulting in net impairment charges totaling $ 3 million for the year ended December 31, 2020. As of December 31, 2021 and 2020, assets and liabilities held for sale were immaterial. In the second quarter of 2020, we completed the sale of one of these businesses, a non-core telecommunications operation in Germany, resulting in an immaterial loss on sale (presented in Loss on disposal of businesses and impairment of net assets held for sale in the Consolidated Statements of Income). The disposed business was immaterial, generating annualized revenue of approximately $ 78 million during the twelve-month period ended May 31, 2020. In the third quarter of 2019, we completed the sales of two of these businesses, an aviation business in North America and a wholesale business in Bulgaria, resulting in a net $ 47 million impairment charge for the year ended December 31, 2019 (presented in Loss on disposal of businesses and impairment of net assets held for sale in the Consolidated Statements of Income). Excluding the Stahlgruber Czech Republic wholesale business discussed in Note 2, "Discontinued Operations," as of December 31, 2019, assets and liabilities held for sale were immaterial, and were recorded within Prepaid expenses and other 73 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS current assets and Other current liabilities, respectively, on the Consolidated Balance Sheet. The disposed businesses in 2019 were immaterial, generating annualized revenue of approximately $ 55 million prior to the divestitures. We record the net assets of held for sale businesses at the lower of fair value less cost to sell or carrying value. Fair values were based on projected discounted cash flows and/or estimated selling prices. Management's assumptions for the discounted cash flow analyses of the businesses were based on projected revenues and profits, tax rates, capital expenditures, working capital requirements and discount rates. For businesses for which we utilized estimated selling prices to calculate the fair value, the inputs to the estimates included projected market multiples and any reasonable offers. Due to uncertainties in the estimation process, it is possible that actual results could differ from the estimates used in management's analysis. The inputs utilized in the fair value estimates are classified as Level 3 within the fair value hierarchy. The fair values of the net assets were measured on a non-recurring basis as of December 31, 2021. Impairment of Long-Lived Assets Long-lived assets are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. Other than the impairment charges recorded upon the classification of certain businesses in our North America and Europe segments as held for sale discussed in the "Net Assets Held for Sale" section above, there were no material impairments to the carrying value of long-lived assets during the years ended December 31, 2021, 2020 or 2019. Investments in Unconsolidated Subsidiaries Our investment in unconsolidated subsidiaries was $ 181 million and $ 155 million as of December 31, 2021 and December 31, 2020, respectively. Europe Segment Our investment in unconsolidated subsidiaries in Europe was $ 156 million and $ 137 million as of December 31, 2021 and 2020, respectively. We recorded equity in earnings of $ 18 million and $ 8 million during the years ended December 31, 2021 and 2020, respectively, and equity in losses of $ 33 million during the year ended December 31, 2019, mainly related to the investment in Mekonomen. On December 1, 2016, we acquired a 26.5 % equity interest in Mekonomen for an aggregate purchase price of $ 181 million. In October 2018, we acquired an additional $ 48 million of equity in Mekonomen at a discounted share price as part of Mekonomen's rights issue, increasing our equity interest to 26.6 %. We are accounting for our interest in Mekonomen using the equity method of accounting, as this investment gives us the ability to exercise significant influence, but not control, over the investee. As of December 31, 2021, our share of the book value of Mekonomen's net assets exceeded the book value of the investment in Mekonomen by $ 8 million; this difference is primarily related to Mekonomen's Accumulated Other Comprehensive Income balance as of the acquisition date in 2016. We are recording our equity in the net earnings of Mekonomen on a one quarter lag. During the year ended December 31, 2019, we recognized an other-than-temporary impairment charge of $ 40 million, which represented the difference in the carrying value and the fair value of our investment in Mekonomen. The fair value of the investment in Mekonomen was determined using the Mekonomen share price as of the date of our impairment test. The impairment charge is recorded in Equity in earnings (losses) of unconsolidated subsidiaries in the Consolidated Statements of Income. Mekonomen announced in February 2019, March 2020, and February 2021 that the Mekonomen Board of Directors proposed no dividend payment in 2019, 2020, or 2021. In the event a dividend would be proposed, it would be payable in SEK. The Level 1 fair value of our equity investment in the publicly traded Mekonomen common stock at December 31, 2021 was $ 265 million (using the Mekonomen share price of SEK 157 as of December 31, 2021) compared to a carrying value of $ 145 million. 74 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS North America Segment Our investment in unconsolidated subsidiaries in the North America segment was $ 25 million and $ 19 million as of December 31, 2021 and December 31, 2020, respectively. We recorded equity in earnings or (losses) of $ 5 million, $( 3 ) million, and $ 1 million for the years ended December 31, 2021, 2020, and 2019, respectively. Warranty Reserve Some of our salvage mechanical products are sold with a standard six month warranty against defects. Additionally, some of the remanufactured engines are sold with a standard three or four year warranty against defects. We also provide a limited lifetime warranty for certain of our aftermarket products. These assurance-type warranties are not considered a separate performance obligation, and thus no transaction price is allocated to them. We record warranty costs in Cost of goods sold in our Consolidated Statements of Income. Our warranty reserve is calculated using historical claim information to project future warranty claims activity and is recorded within Other accrued expenses and Other noncurrent liabilities on our Consolidated Balance Sheets based on the expected timing of the related payments. The changes in the warranty reserve are as follows (in thousands): Warranty Reserve Balance as of January 1, 2020 $ 25,441 Warranty expense 67,365 Warranty claims ( 64,892 ) Balance as of December 31, 2020 27,914 Warranty expense 74,375 Warranty claims ( 72,740 ) Balance as of December 31, 2021 $ 29,549 Self-Insurance Reserves We self-insure a portion of our employee medical benefits under the terms of our employee health insurance program. We purchase certain stop-loss insurance to limit our liability exposure. We also self-insure a portion of our property and casualty risk, which includes automobile liability, general liability, directors and officers liability, workers' compensation, and property coverage, under deductible insurance programs. The insurance premium costs are expensed over the contract periods. A reserve for liabilities associated with these losses is established for claims filed and claims incurred but not yet reported based upon our estimate of the ultimate cost, which is calculated using an analysis of historical data. We monitor new claim and claim developments as well as trends related to the claims incurred but not reported in order to assess the adequacy of our insurance reserves. Total self-insurance reserves were $ 117 million and $ 110 million, of which $ 61 million and $ 55 million was classified as current, as of December 31, 2021 and 2020, respectively, and are classified as Other accrued expenses on the Consolidated Balance Sheets. The remaining balances of self-insurance reserves are classified as Other noncurrent liabilities, which reflects management's estimates of when claims will be paid. We had outstanding letters of credit of $ 69 million and $ 71 million at December 31, 2021 and 2020, respectively, to guarantee self-insurance claims payments. While we do not expect the amounts ultimately paid to differ significantly from the estimates, the insurance reserves and corresponding expenses could be affected if future claims experience differs significantly from historical trends and assumptions. Litigation and Related Contingencies We have certain contingencies resulting from litigation, claims and other commitments and are subject to a variety of environmental and pollution control laws and regulations incident to the ordinary course of business. We currently expect that the resolution of such contingencies will not materially affect our financial position, results of operations or cash flows. 75 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Government Assistance During the years ended December 31, 2021 and 2020, we recorded financial assistance from foreign governments, primarily in the form of grants, as credits in the following amounts (in thousands): Year Ended December 31, 2021 2020 Cost of goods sold $ 547 $ 1,422 Selling, general and administrative expenses 15,419 50,647 Total government assistance $ 15,966 $ 52,069 During the years ended December 31, 2021 and 2020, we received grants from European governments of $ 11 million and $ 43 million, respectively, with the remaining amounts relating to Canada. Financial assistance received from governments is recorded during the period in which we incur the costs that the assistance is intended to offset (and only if it is probable that we will meet the conditions required under the terms of the assistance). On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was enacted in the U.S. to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. Similar legislation was enacted in many of the international jurisdictions in which we operate. Tax impacts in these legislative actions did not have a material impact on our results of operations for the years ended December 31, 2021 and 2020. Those initiatives did provide us with the opportunity to defer the timing of certain income tax, indirect tax and payroll tax payments in various jurisdictions. As of December 31, 2020, approximately $ 30 million of payments otherwise due by the end of 2020 were deferred, of which we paid half in 2021 and will pay the other half in 2022. Income Taxes Current income taxes are provided on income reported for financial reporting purposes, adjusted for transactions that do not enter into the computation of income taxes payable in the same year. Deferred income taxes are provided for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before we are able to realize their benefit or that future deductibility is uncertain. Provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested. We recognize the benefits of uncertain tax positions taken or expected to be taken in tax returns in the provision for income taxes only for those positions that are more likely than not to be realized. We follow a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50 % likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. Our policy is to include any interest and penalties associated with income tax obligations in income tax expense. Stockholders' Equity Treasury Stock On October 25, 2018, our Board of Directors authorized a stock repurchase program under which we may purchase up to $ 500 million of our common stock from time to time through October 25, 2021. On October 25, 2019, our Board of Directors authorized an increase to our existing stock repurchase program under which the Company may purchase up to an additional $ 500 million of our common stock from time to time through October 25, 2022; this extended date also applied to the original repurchase program. On July 28, 2021, our Board of Directors authorized an increase to our existing stock repurchase program under which the Company may purchase up to an additional $ 1,000 million of our common stock from time to time through October 25, 2024; this extended date also applies to the original repurchase program, as previously extended. With the increase, the Board of Directors has authorized a total of $ 2,000 million of common stock repurchases. 76 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Repurchases under the program may be made in the open market or in privately negotiated transactions, with the amount and timing of repurchases depending on market conditions and corporate needs. The repurchase program does not obligate us to acquire any specific number of shares and may be suspended or discontinued at any time. Delaware law imposes restrictions on stock repurchases. Repurchased shares are accounted for as treasury stock using the cost method. During the year ended December 31, 2021, we repurchased 17.2 million shares of common stock for an aggregate price of $ 877 million. During the year ended December 31, 2020, we repurchased 4.1 million shares of common stock for an aggregate price of $ 117 million. During 2019, we repurchased 10.9 million shares of common stock for an aggregate price of $ 292 million. As of December 31, 2021, there was $ 654 million of remaining capacity under the repurchase program. Repurchased shares are accounted for as treasury stock using the cost method. Noncontrolling Interest In October 2020, we purchased all of the noncontrolling interest of a subsidiary in our North America segment for a purchase price of $ 10 million. This purchase resulted in a net decrease to Noncontrolling interest of $ 10 million and a decrease to Additional paid-in-capital of $ 1 million in our Consolidated Financial Statements as of December 31, 2020. In February 2020, as part of the sale of Stahlgruber's Czech Republic business, we divested the noncontrolling interest of the business, which resulted in a net decrease to Noncontrolling interest of $ 11 million in the Consolidated Financial Statements as of December 31, 2020. See Note 2, "Discontinued Operations," for further information. In July 2019, we purchased substantially all of the noncontrolling interest of a subsidiary acquired in connection with the Stahlgruber acquisition for a purchase price of $ 19 million, which included the issuance of $ 14 million of notes payable. This purchase resulted in a net decrease to Noncontrolling interest of $ 10 million and a decrease to Additional paid-in capital of $ 9 million in the Consolidated Financial Statements as of December 31, 2019. In December 2019, we modified the shares of a noncontrolling interest of a subsidiary acquired in connection with the Stahlgruber acquisition and issued new redeemable shares to the minority shareholder. The new redeemable shares contain (i) a put option for all noncontrolling interest shares at a fixed price of $ 24 million (€ 21 million) for the minority shareholder exercisable in the fourth quarter of 2023, (ii) a call option for all noncontrolling interest shares at a fixed price of $ 26 million (€ 23 million) for us exercisable beginning in the first quarter of 2026 through the end of the fourth quarter of 2027, and (iii) a guaranteed dividend to be paid quarterly to the minority shareholder through the fourth quarter of 2023. The new redeemable shares do not provide the minority shareholder with rights to participate in the profits and losses of the subsidiary prior to the exercise date of the put option. As the put option is outside our control, we recorded a $ 24 million Redeemable noncontrolling interest at the put option's redemption value outside of permanent equity on our Consolidated Balance Sheets. This transaction also resulted in a decrease to Additional paid-in capital of $ 18 million, a decrease to Noncontrolling interest of $ 12 million, and a $ 7 million dividend payable ($ 2 million recorded in Other current liabilities and $ 5 million in Other noncurrent liabilities) in the Consolidated Financial Statements as of December 31, 2019. The redeemable noncontrolling interest and dividend payable represent noncash financing activities in the Consolidated Statements of Cash Flows in 2019. Foreign Currency Translation For most of our foreign operations, the local currency is the functional currency. Assets and liabilities are translated into U.S. dollars at the period-ending exchange rate. Statements of Income amounts are translated to U.S. dollars using monthly average exchange rates during the period. Translation gains and losses are reported as a component of Accumulated other comprehensive income (loss) in stockholders' equity. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In the first quarter of 2021, we adopted ASU No. 2019-12, "Income Taxes" (Topic 740) ("ASU 2019-12"), which simplifies the accounting for income taxes and adds guidance to reduce complexity in certain areas. We adopted the standard using the prospective approach and adoption of this accounting standard did not have a material impact on our Consolidated Financial Statements. 77 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In the fourth quarter of 2021, we adopted ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"), which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. ASU 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made (i.e., as early as the first quarter of 2020). Unlike other topics, the provisions of this update are only available until December 31, 2022. The adoption of the standard did not have a significant impact on our financial position, results of operations, or cash flows. Note 4. Revenue Recognition The majority of our revenue is derived from the sale of vehicle parts. We recognize revenue for the sale of products at the point in time when the performance obligation has been satisfied and control has transferred to the customer, which generally occurs upon shipment or delivery to a customer based on terms of the sale. Sources of Revenue We report revenue in two categories: (i) parts and services and (ii) other. The following table sets forth revenue by category, with parts and services revenue further disaggregated by reportable segment (in thousands): Year Ended December 31, 2021 2020 2019 North America $ 4,243,203 $ 3,988,214 $ 4,600,903 Europe 6,033,396 5,470,159 5,817,547 Specialty 1,863,917 1,505,340 1,459,396 Parts and services 12,140,516 10,963,713 11,877,846 Other 947,988 665,117 628,263 Total revenue $ 13,088,504 $ 11,628,830 $ 12,506,109 Parts and Services Parts revenue is generated from the sale of vehicle products including replacement parts, components and systems used in the repair and maintenance of vehicles and specialty products and accessories to improve the performance, functionality and appearance of vehicles. Services revenue includes (i) additional services that are generally billed concurrently with the related product sales, such as the sale of service-type warranties, (ii) fees for admission to our self service yards, and (iii) diagnostic and repair services. In North America, vehicle replacement products include sheet metal collision parts such as doors, hoods, and fenders; bumper covers; head and tail lamps; automotive glass products such as windshields; mirrors and grilles; wheels; and large mechanical items such as engines and transmissions. In Europe, vehicle replacement products include a wide variety of small mechanical products such as brake pads, discs and sensors; clutches; electrical products such as spark plugs and batteries; steering and suspension products; filters; and oil and automotive fluids. In Specialty operations, we serve seven product segments: truck and off-road; speed and performance; recreational vehicles; towing; wheels, tires and performance handling; marine; and miscellaneous accessories. 78 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Our service-type warranties typically have service periods ranging from 6 months to 36 months. Under FASB Accounting Standards Codification Topic 606 ("ASC 606"), proceeds from these service-type warranties are deferred at contract inception and amortized on a straight-line basis to revenue over the contract period. The changes in deferred service-type warranty revenue are as follows (in thousands): Service-Type Warranties Balance as of January 1, 2020 $ 27,067 Additional warranty revenue deferred 43,214 Warranty revenue recognized ( 44,659 ) Balance as of December 31, 2020 25,622 Additional warranty revenue deferred 70,561 Warranty revenue recognized ( 64,526 ) Balance as of December 31, 2021 $ 31,657 Other Revenue Revenue from other sources includes sales of scrap and precious metals (platinum, palladium, and rhodium), bulk sales to mechanical manufacturers (including cores) and sales of aluminum ingots and sows from furnace operations. We derive scrap metal and other precious metals from several sources, including vehicles that have been used in both our wholesale and self service recycling operations and from OEMs and other entities that contract with us for secure disposal of "crush only" vehicles. Revenue from the sale of hulks in wholesale and self service recycling operations is recognized based on a price per ton of delivered material when the customer (processor) collects the scrap. Some adjustments may occur when the customer weighs the scrap at their location, and revenue is adjusted accordingly. Revenue by Geographic Area See Note 15, "Segment and Geographic Information" for information related to our revenue by geographic region. Variable Consideration The amount of revenue ultimately received from the customer can vary due to variable consideration including returns, discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items. We utilize the “expected value method” or the “most likely amount” method in order to estimate variable consideration, depending on the type of variable consideration, with contemplation of any expected reversals in revenue. We recorded a refund liability and return asset for expected returns of $ 107 million and $ 58 million, respectively, as of December 31, 2021, and $ 102 million and $ 57 million, respectively, as of December 31, 2020. The refund liability is presented separately on the Consolidated Balance Sheets within current liabilities while the return asset is presented within Prepaid expenses and other current assets. Other types of variable consideration consist primarily of discounts, volume rebates, and other customer sales incentives that are recorded in Receivables, net on the Consolidated Balance Sheets. We recorded a reserve for variable consideration of $ 144 million and $ 127 million as of December 31, 2021 and 2020, respectively. While other customer incentive programs exist, we characterize them as material rights in the context of our sales transactions. We consider these programs to be immaterial to the Consolidated Financial Statements. Contract Costs Under ASC 340, "Other Assets and Deferred Costs," we have elected to recognize incremental costs of obtaining a contract (commissions earned by our sales representatives on product sales) as an expense when incurred, as we believe the amortization period of the asset would be one year or less due to the short-term nature of our contracts. Sales Taxes Sales tax amounts collected from customers for remittance to governmental authorities are presented on a net basis. Therefore, the taxes are excluded from revenue in the Consolidated Statements of Income and are shown as a current liability on the Consolidated Balance Sheets until remitted. 79 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5. Restructuring and Acquisition Related Expenses Acquisition Related Expenses We incurred $ 3 million of acquisition related expenses for the year ended December 31, 2021. These expenses included external costs such as legal, accounting and advisory fees related to completed and potential transactions. We incurred $ 8 million of acquisition related expenses for the year ended December 31, 2020. The expenses primarily resulted from the resolution of a purchase price matter related to the Stahlgruber transaction for an amount above our prior estimate. We incurred $ 2 million of acquisition related expenses for the year ended December 31, 2019. These expenses included external costs such as legal, accounting and advisory fees related to our acquisitions. 2019 Global Restructuring Program In the second quarter of 2019, we commenced a cost reduction initiative, covering all three of our reportable segments, designed to eliminate underperforming assets and cost inefficiencies. We have incurred and expect to incur costs for inventory write-downs; employee severance and other expenditures related to employee terminations; lease exit costs, such as lease termination fees, accelerated amortization of operating lease assets and impairment of operating lease assets; other costs related to facility exits, such as moving expenses to relocate inventory and equipment; and accelerated depreciation of fixed assets to be disposed earlier than the end of the previously estimated useful lives. During the year ended December 31, 2020, we incurred $ 7 million of restructuring expenses primarily related to facility exit costs and employee-related costs. These costs were recorded within Restructuring and acquisition related expenses in the Consolidated Statements of Income. Of the program costs incurred during 2020, $ 4 million and $ 3 million related to the Europe and North America segments, respectively. During the year ended December 31, 2019, we incurred $ 37 million primarily related to inventory write-downs, facility exit costs, and employee-related costs. Of these expenses, $ 17 million, primarily related to Andrew Page Limited ("Andrew Page") branch consolidation and brand rationalization, was recorded within Cost of goods sold in the Consolidated Statement of Income during the year ended December 31, 2019, and $ 20 million was recorded within Restructuring and acquisition related expenses. Of the program costs incurred during 2019, $ 25 million, $ 11 million and $ 1 million related to the Europe, North America and Specialty segments, respectively. The actions under this program are substantially complete, and the expenses incurred during the year ended December 31, 2021 were $ 2 million. The total cumulative program costs incurred to date were $ 47 million, of which $ 31 million, $ 14 million and $ 1 million were in the Europe, North America and Specialty segments, respectively. As of December 31, 2021, restructuring liabilities related to this program were immaterial. 2020 Global Restructuring Program Beginning in the first quarter of 2020, we initiated a further restructuring program aimed at cost reductions across all our reportable segments through the elimination of underperforming assets and cost inefficiencies. These actions are incremental to those initiated as part of the 2019 Global Restructuring Program, and include costs for inventory write-downs; employee severance and other expenditures related to employee terminations; lease exit costs, such as lease termination fees, accelerated amortization of operating lease assets and impairment of operating lease assets; other costs related to facility exits, such as moving expenses to relocate inventory and equipment; and accelerated depreciation of fixed assets to be disposed of earlier than t he end of the previously estimated useful lives. We expanded this program during the second and third quarters of 2020 as we identified additional opportunities to eliminate inefficiencies, including actions in response to impacts to the business from COVID-19. During the year ended December 31, 2021, we recognized net restructuring expenses totaling $ 9 million which included employee-related costs, facility exit costs and a $ 3 million gain in the first quarter from the sale of a building to be closed as part of the restructuring plan. During the year ended December 31, 2020, we recognized restructuring expenses totaling $ 50 million for employee-related costs, facility exit costs and inventory write-downs. Of these expenses, $ 7 million resulted from inventory impairment charges related to facility consolidation actions and brand rationalizations and were recorded in Cost of goods sold in the Consolidated Statement of Income. Of the cumulative program costs incurred to date, $ 30 million, $ 27 million, and $ 1 million related to our North America, Europe and Specialty segments, respectively. We estimate total costs under the program through the program's expected completion date in 2023 will be between $ 60 million and $ 70 million, of 80 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS which approximately $ 32 million, $ 32 million, and $ 1 million will be incurred by our Europe, North America and Specialty segments, respectively; these segment amounts represent the midpoints of the expected ranges of costs to be incurred by each segment. As of December 31, 2021 and December 31, 2020, restructuring liabilities related to this program totaled $ 11 million and $ 21 million, respectively, including $ 9 million and $ 17 million, respectively, related to leases we exited or expect to exit prior to the end of the lease term (reported in Current portion of operating lease liabilities and Long-term operating lease liabilities, excluding current portion on our Consolidated Balance Sheets), and $ 2 million and $ 4 million, respectively, for employee termination costs (reported in Accrued payroll-related liabilities on our Consolidated Balance Sheets). Our lease-related restructuring liabilities are estimated based on the remaining rent payments after the actual exit date for facilities closed as of December 31, 2021 and after the planned exit date for facilities expected to close in future periods; these liabilities do not reflect any estimated proceeds we may be able to achieve through subleasing the facilities. Acquisition Integration Plans During the year ended December 31, 2021, we incurred immaterial restructuring expenses for our acquisition plans. We expect to incur future expenses of up to $ 5 million to complete an integration plan related to acquisitions completed in the Specialty segment during the year ended December 31, 2021. During the year ended December 31, 2020, we incurred $ 9 million of restructuring expenses for our acquisition integration plans. These expenses were primarily related to the integration of operations in Belgium. During the year ended December 31, 2019, we incurred $ 18 million of restructuring expenses primarily related to the acquisition integration efforts in our Europe segment. These expenses included $ 14 million related to the integration of the acquisition of Andrew Page, including $ 4 million within Cost of goods sold in the Consolidated Statement of Income. 1 LKQ Europe Program In September 2019, we announced a multi-year program called "1 LKQ Europe" which is intended to create structural centralization and standardization of key functions to facilitate the operation of the Europe segment as a single business. Under the 1 LKQ Europe program, we will reorganize our non-customer-facing teams and support systems through various projects including the implementation of a common ERP platform, rationalization of our product portfolio, and creation of a Europe headquarters office and central back office. While certain projects were delayed in 2020 as a result of the COVID-19 pandemic, such as the 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 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 $ 6 million of employee-related restructuring charges under the 1 LKQ Europe program. We estimate that we will incur between $ 40 million and $ 50 million in total personnel and inventory related restructuring charges through 2024 under the program. We may identify additional initiatives and projects under the 1 LKQ Europe program in future periods that may result in additional restructuring expense, although we are currently unable to estimate the range of charges for such potential future initiatives and projects. As of December 31, 2021, the restructuring liabilities related to this program were immaterial. Note 6. Stock-Based Compensation In order to attract and retain employees, non-employee directors, consultants, and other persons associated with the Company, we grant equity-based awards under the LKQ Corporation 1998 Equity Incentive Plan (the “Equity Incentive Plan”). The total number of shares approved by stockholders for issuance under the Equity Incentive Plan is 70 million shares, subject to antidilution and other adjustment provisions. We have granted restricted stock units ("RSUs"), stock options, and restricted stock under the Equity Incentive Plan. Of the shares approved by stockholders for issuance under the Equity Incentive Plan, 9 million shares remained available for issuance as of December 31, 2021. We expect to issue new or treasury shares of common stock to cover past and future equity grants. 81 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RSUs The RSUs we have issued vest over periods of up to five years , subject to a continued service condition. Currently outstanding RSUs (other than PSUs, which are described below) contain either a time-based vesting condition or a combination of a performance-based vesting condition and a time-based vesting condition, in which case both conditions must be met before any RSUs vest. For all of the RSUs containing a performance-based vesting condition, we must report positive diluted earnings per share, subject to certain adjustments, during any fiscal year period within five years following the grant date. Each RSU converts into one share of LKQ common stock on the applicable vesting date. The grant date fair value of RSUs is based on the market price of LKQ stock on the grant date. Starting with our 2019 grants, participants who are eligible for retirement (defined as a voluntary separation of service from the Company after the participant has attained at least 60 years of age and completed at least five years of service) will continue to vest in their awards following retirement; if retirement occurs during the first year of the vesting period (for RSUs subject to a time-based vesting condition) or the first year of the performance period (for RSUs with a performance-based vesting condition), the participant vests in a prorated amount of the RSU grant based on the portion of the year employed. For our RSU grants prior to 2019, participants forfeit their unvested shares upon retirement. Outstanding unvested RSUs earn dividend equivalents at the same rate as dividends on LKQ’s common stock. The dividend equivalents are subject to the same vesting requirements, restrictions and forfeiture provisions as the original award. The Compensation Committee of our Board of Directors (the "Compensation Committee") approved the grant of 208,603 , 230,360 , and 270,388 RSUs to our executive officers that included both a performance-based vesting condition and a time-based vesting condition in 2021, 2020, and 2019, respectively. The performance-based vesting conditions for the 2021, 2020, and 2019 grants to our executive officers have been satisfied. The fair value of RSUs that vested during the years ended December 31, 2021, 2020, and 2019 was $ 37 million, $ 27 million, and $ 22 million, respectively; the fair value of RSUs vested is based on the market price of LKQ stock on the date vested. The following table summarizes activity related to our RSUs under the Equity Incentive Plan for the year ended December 31, 2021: Number Outstanding Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) (1) Unvested as of January 1, 2021 1,479,672 $ 31.71 Granted (2) 738,014 $ 39.22 Vested ( 805,529 ) $ 33.11 Forfeited / Canceled ( 55,078 ) $ 34.39 Unvested as of December 31, 2021 1,357,079 $ 34.85 Expected to vest after December 31, 2021 1,180,689 $ 34.84 2.6 $ 70,877 (1) The aggregate intrinsic value of expected to vest RSUs represents the total pretax intrinsic value (the fair value of LKQ's stock on the last day of the period multiplied by the number of units) that would have been received by the holders had all the expected to vest RSUs vested. This amount changes based on the market price of LKQ’s common stock. (2) The weighted average grant date fair value of RSUs granted during the years ended December 31, 2020 and 2019 was $ 31.68 and $ 27.82 , respectively. Starting in 2019, we granted performance-based three-year RSUs ("PSUs") to certain employees, including executive officers, under our Equity Incentive Plan. As these awards are performance-based, the exact number of shares to be paid out may be up to twice the grant amount, depending on our performance and the achievement of certain performance metrics (adjusted earnings per share, average organic parts and services revenue growth, and average return on invested capital) over the applicable three year performance periods. Outstanding unvested PSUs earn dividend equivalents at the same rate as dividends on LKQ's common stock. The dividend equivalents are subject to the same vesting requirements, restrictions and forfeiture provisions as the original award. 82 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes activity related to our PSUs under the Equity Incentive Plan for the year ended December 31, 2021: Number Outstanding Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) (1) Unvested as of January 1, 2021 291,601 $ 29.98 Granted (2) 125,656 $ 38.31 Performance-based adjustment (3) 52,562 $ 27.72 Forfeited / Canceled ( 11,800 ) $ 31.77 Unvested as of December 31, 2021 458,019 $ 31.96 Expected to vest after December 31, 2021 447,595 $ 32.01 1.0 $ 26,869 (1) The aggregate intrinsic value of expected to vest PSUs represents the total pretax intrinsic value (the fair value of LKQ's stock on the last day of each period multiplied by the number of units) that would have been received by the holders had all the expected to vest PSUs vested. This amount changes based on the market price of LKQ’s common stock and the achievement of the performance metrics relative to the established targets. (2) Represents the number of PSUs at target payout. The weighted average grant date fair value of PSUs granted during the years ended December 31, 2020 and 2019 was $ 31.85 and $ 27.69 , respectively. (3) Represents the net adjustment to the number of shares issuable upon vesting of performance-based PSUs based on the Company's actual financial performance metrics for the three year performance period ended December 31, 2021. Stock Options Stock options vested over periods of up to five years , subject to a continued service condition. Stock options expired either six years or ten years from the date they were granted. No options were outstanding as of December 31, 2021 or 2020. Stock-Based Compensation Expense For the RSUs that contain both a performance-based vesting condition and a time-based vesting condition, we recognize compensation expense under the accelerated attribution method, pursuant to which expense is recognized over the requisite service period for each separate vesting tranche of the award. During the years ended December 31, 2021, 2020, and 2019, we recognized $ 7 million , $ 11 million, and $ 11 million, respectively, of stock based compensation expense related to the RSUs containing a performance-based vesting condition. For all other awards, which are subject to only a time-based vesting condition, we recognize compensation expense on a straight-line basis over the requisite service period of the entire award. The PSU expense is calculated using the projected award value, which is based on an estimate of the achievement of the performance objectives, and is recognized on a straight-line basis over the performance period. Forfeitures on RSUs and PSUs are recorded as they occur. Pre-tax stock-based compensation expense for RSUs and PSUs totaled $ 34 million, $ 29 million, and $ 28 million for the years ended December 31, 2021, 2020, and 2019, respectively. The following table sets forth the classification of total stock-based compensation expense included in the Consolidated Statements of Income for our continuing operations (in thousands): Year Ended December 31, 2021 2020 2019 Cost of goods sold $ 649 $ 506 $ 477 Selling, general and administrative expenses 33,087 28,572 27,218 Total stock-based compensation expense 33,736 29,078 27,695 Income tax benefit ( 7,479 ) ( 6,614 ) ( 6,227 ) Total stock-based compensation expense, net of tax $ 26,257 $ 22,464 $ 21,468 We did not capitalize any stock-based compensation costs during the years ended December 31, 2021, 2020, and 2019. 83 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2021, unrecognized compensation expense related to unvested RSUs and PSUs is expected to be recognized as follows (in thousands): Unrecognized Compensation Expense 2022 $ 21,325 2023 13,169 2024 6,040 2025 3,039 2026 177 Total unrecognized compensation expense $ 43,750 Stock-based compensation expense related to these awards will be different to the extent that forfeitures are realized and performance under the PSUs differs from current achievement estimates. Note 7. Earnings Per Share Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporate the incremental shares issuable upon the assumed exercise of stock options and the assumed vesting of RSUs. Certain of our RSUs and stock options were excluded from the calculation of diluted earnings per share because they were antidilutive, but these equity instruments could be dilutive in the future. The following chart sets forth the computation of earnings per share (in thousands, except per share amounts): Year Ended December 31, 2021 2020 2019 Income from continuing operations $ 1,091,476 $ 640,509 $ 543,415 Denominator for basic earnings per share—Weighted-average shares outstanding 296,836 304,640 310,155 Effect of dilutive securities: RSUs 672 362 393 PSUs 214 3 — Stock options — 1 421 Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding 297,722 305,006 310,969 Basic earnings per share from continuing operations $ 3.68 $ 2.10 $ 1.75 Diluted earnings per share from continuing operations (1) $ 3.67 $ 2.10 $ 1.75 (1) Diluted earnings per share from continuing operations was computed using the treasury stock method for dilutive securities. The following table sets forth the number of employee stock-based compensation awards outstanding but not included in the computation of diluted earnings per share because their effect would have been antidilutive for the years ended December 31, 2021, 2020, and 2019 (in thousands): Year Ended December 31, 2021 2020 2019 Antidilutive securities: RSUs 29 673 586 Stock options — — 24 84 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Accumulated Other Comprehensive Income (Loss) The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands): Foreign Currency Translation Unrealized Gain (Loss) on Cash Flow Hedges Unrealized Gain (Loss) on Pension Plans Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries Accumulated Other Comprehensive Income (Loss) Balance as of January 1, 2019 $ ( 177,597 ) $ 14,374 $ ( 8,075 ) $ ( 3,652 ) $ ( 174,950 ) Pretax income (loss) 7,083 23,850 ( 31,801 ) — ( 868 ) Income tax effect — ( 5,579 ) 8,579 — 3,000 Reclassification of unrealized gain — ( 35,686 ) ( 782 ) — ( 36,468 ) Reclassification of deferred income taxes — 8,399 145 — 8,544 Disposal of business ( 379 ) — — — ( 379 ) Other comprehensive income from unconsolidated subsidiaries — — — 236 236 Balance as of December 31, 2019 $ ( 170,893 ) $ 5,358 $ ( 31,934 ) $ ( 3,416 ) $ ( 200,885 ) Pretax income (loss) 112,695 ( 48,540 ) ( 9,165 ) — 54,990 Income tax effect — 11,559 3,058 — 14,617 Reclassification of unrealized loss — 40,359 6,926 — 47,285 Reclassification of deferred income taxes — ( 9,704 ) ( 1,852 ) — ( 11,556 ) Disposal of businesses 1,072 — — — 1,072 Other comprehensive loss from unconsolidated subsidiaries — — — ( 4,532 ) ( 4,532 ) Balance as of December 31, 2020 $ ( 57,126 ) $ ( 968 ) $ ( 32,967 ) $ ( 7,948 ) $ ( 99,009 ) Pretax (loss) income ( 63,477 ) 2,937 10,901 — ( 49,639 ) Income tax effect — ( 698 ) ( 3,267 ) — ( 3,965 ) Reclassification of unrealized (gain) loss — ( 1,758 ) 1,649 — ( 109 ) Reclassification of deferred income taxes — 481 ( 472 ) — 9 Disposal of businesses 12 — — — 12 Other comprehensive loss from unconsolidated subsidiaries — — — ( 429 ) ( 429 ) Balance as of December 31, 2021 $ ( 120,591 ) $ ( 6 ) $ ( 24,156 ) $ ( 8,377 ) $ ( 153,130 ) 85 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The amounts of unrealized gains and losses on the Cash Flow Hedges reclassified to the Consolidated Statements of Income are as follows (in thousands): Year Ended December 31, Classification 2021 2020 2019 Unrealized (losses) gains on interest rate swaps Interest expense $ ( 1,188 ) $ ( 3,160 ) $ 5,872 Unrealized gains on cross currency swaps Interest expense 539 10,188 15,794 Unrealized gains (losses) on cross currency swaps (1) Interest income and other income, net 1,973 ( 38,198 ) 14,020 Unrealized gains (losses) on foreign currency forward contracts (1) Interest income and other income, net 434 ( 9,189 ) — Total $ 1,758 $ ( 40,359 ) $ 35,686 (1) The amounts reclassified to Interest income and other income, net in the Consolidated Statements of Income offset the impact of the remeasurement of the underlying transactions. Net unrealized losses and gains related to our pension plans were reclassified to Interest income and other income, net in the Consolidated Statements of Income during each of the years ended December 31, 2021, 2020 and 2019. Our policy is to reclassify the income tax effect from Accumulated other comprehensive loss to the Provision for income taxes when the related gains and losses are released to the Consolidated Statements of Income. Note 9. Long-Term Obligations Long-term obligations consist of the following (in thousands): December 31, 2021 2020 Senior secured credit agreement: Term loans payable $ — $ 323,750 Revolving credit facilities 1,886,802 642,958 Euro Notes (2024) 568,500 610,800 Euro Notes (2026/28) 284,250 1,221,600 Notes payable through October 2030 at weighted average interest rates of 2.8% and 3.3%, respectively 23,318 24,526 Finance lease obligations at weighted average interest rates of 3.5% and 3.5%, respectively 51,556 57,336 Other debt at weighted average interest rates of 1.1% and 1.2%, respectively 9,405 15,706 Total debt 2,823,831 2,896,676 Less: long-term debt issuance costs ( 11,604 ) ( 25,225 ) Less: current debt issuance costs ( 315 ) ( 313 ) Total debt, net of debt issuance costs 2,811,912 2,871,138 Less: current maturities, net of debt issuance costs ( 34,752 ) ( 58,497 ) Long term debt, net of debt issuance costs $ 2,777,160 $ 2,812,641 86 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The scheduled maturities of long-term obligations outstanding at December 31, 2021 are as follows (in thousands): Long-Term Obligations 2022 (1) $ 35,067 2023 13,820 2024 2,463,996 2025 9,580 2026 3,386 Thereafter 297,982 Total debt (2) $ 2,823,831 (1) Maturities of long-term obligations due by December 31, 2022 includes $ 16 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 $ 12 million as of December 31, 2021). Senior Secured Credit Agreement On June 11, 2020, LKQ Corporation and certain other subsidiaries of LKQ (collectively, the "Borrowers") entered into Amendment No. 4 to the Fourth Amended and Restated Credit Agreement dated January 29, 2016 (the "Credit Agreement"), which modified the maximum permitted net leverage ratio through the quarter ended September 30, 2021. Beginning with the quarter ended December 31, 2021, the maximum permitted net leverage ratio reverted to the terms in effect prior to the amendment, or 4.00 :1.00. Amendment No. 4 to the Credit Agreement also made certain other immaterial modifications. On December 14, 2020, we entered into Amendment No. 5 to the Credit Agreement; the amendment added as a borrower a subsidiary, LKQ Europe GmbH, a Swiss limited liability company, and made certain other immaterial or clarifying modifications. On November 23, 2021, we entered into Amendment No. 6 to the Credit Agreement; the amendment modified certain interest rates to provide that (1) Loans denominated in euros shall bear interest at a rate per annum equal to the Euro Interbank Offered Rate as administered by the European Money Markets Institute (or a comparable or successor administrator approved by the Administrative Agent) plus the Applicable Rate, (2) Swingline Loans denominated in Pounds Sterling shall bear interest at a rate per annum equal to the Sterling Overnight Index Average as administered by the Bank of England (or any successor administrator of the Sterling Overnight Index Average) (“SONIA”) plus the Applicable Rate, (3) Revolving Loans denominated in Pounds Sterling shall bear interest at a rate per annum equal to SONIA plus an adjustment equal to 0.0326 % per annum plus the Applicable Rate, and (4) Loans denominated in Swiss Francs shall bear interest at a rate per annum equal to the Swiss Average Rate Overnight as administered by SIX Swiss Exchange AG (or any successor administrator of the Swiss Average Rate Overnight) plus the Applicable Rate. All other interest rates remain the same. The total availability under the revolving credit facility's multicurrency component is $ 3,150 million. Amounts outstanding under the revolving credit facility are due and payable upon maturity of the Credit Agreement on January 29, 2024. We also had the option to prepay outstanding amounts under the Credit Agreement without penalty. We were required to prepay the term loan by amounts equal to proceeds from the sale or disposition of certain assets if the proceeds were not reinvested within twelve months. During the second quarter of 2021, we exercised our option to prepay the outstanding amount on the term loan, and thus did not have any term loan borrowings as of December 31, 2021. The Credit Agreement contains customary representations and warranties and customary covenants that provide limitations and conditions on our ability to enter into certain transactions. The Credit Agreement also contains financial and affirmative covenants, including limitations on our net leverage ratio and a minimum interest coverage ratio. Borrowings under the Credit Agreement bear interest at variable rates, which depend on the currency and duration of the borrowing elected, plus an applicable margin. The applicable margin is subject to change in increments of 0.25 % depending on the net leverage ratio. Interest payments are due on the last day of the selected interest period or quarterly in arrears depending on the type of borrowing. Including the effect of the interest rate swap agreements described in Note 10, "Derivative Instruments and Hedging Activities," the weighted average interest rates on borrowings outstanding under the Credit Agreement at December 31, 2021 and 2020 we re 1.1 % and 1.7 %, respectively. We also pay a commitment fee based on the 87 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS average daily unused amount of the revolving credit facilities. The commitment fee is subject to change in increments of 0.05 % depending on our net leverage ratio. In addition, we pay a participation commission on outstanding letters of credit at an applicable rate based on our net leverage ratio, and a fronting fee of 0.125 % to the issuing bank, which are due quarterly in arrears. Of the total borrowings outstanding under the Credit Agreement, there were no current maturities as of December 31, 2021 and $ 18 million classified as current maturities at December 31, 2020. As of December 31, 2021, there were letters of credit outstanding in the aggregate amount of $ 69 million. The amounts available under the revolving credit facilities are reduced by the amounts outstanding under letters of credit, and thus availability under the revolving credit facilities at December 31, 2021 was $ 1,194 million. Related to the execution of Amendment No. 4 to the Fourth Amended and Restated Credit Agreement in June 2020, we incurred $ 4 million of fees, the majority of which were capitalized as an offset to Long-Term Obligations and are amortized over the term of the agreement. U.S. Notes (2023) In 2013, we issued $ 600 million aggregate principal amount of 4.75 % senior notes due 2023 (the "U.S. Notes (2023)"). The U.S. Notes (2023) were governed by the Indenture dated as of May 9, 2013 (the "U.S. Notes (2023) Indenture") among LKQ Corporation, certain of our subsidiaries (the "Guarantors"), the trustee, paying agent, transfer agent and registrar. The U.S. Notes (2023) were registered under the Securities Act of 1933. On January 10, 2020, we redeemed the U.S Notes (2023) at a redemption price equal to 101.583 % of the principal amount of the U.S. Notes (2023) plus accrued and unpaid interest thereon to, but not including, January 10, 2020. The total redemption payment was $ 614 million, including an early-redemption premium of $ 9 million and accrued and unpaid interest of $ 4 million. In the first quarter of 2020, we recorded a loss on debt extinguishment of $ 13 million on the Consolidated Statement of Income related to the redemption due to the early-redemption premium and the write-off of the unamortized debt issuance costs. Euro Notes (2024) On April 14, 2016, LKQ Italia Bondco S.p.A. ("LKQ Italia"), an indirect, wholly-owned subsidiary of LKQ Corporation, completed an offering of € 500 million aggregate principal amount of senior notes due April 1, 2024 (the "Euro Notes (2024)") in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering were used to repay a portion of the revolver borrowings under the Credit Agreement and to pay related fees and expenses. The Euro Notes (2024) are governed by the Indenture dated as of April 14, 2016 (the "Euro Notes (2024) Indenture") among LKQ Italia, LKQ Corporation and certain of our subsidiaries (the "Euro Notes (2024) Subsidiaries"), the trustee, and the paying agent, transfer agent, and registrar. The Euro Notes (2024) bear interest at a rate of 3.875 % per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for. Interest on the Euro Notes (2024) is payable in arrears on April 1 and October 1 of each year. The Euro Notes (2024) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2024) Subsidiaries (the "Euro Notes (2024) Guarantors"). The Euro Notes (2024) and the related guarantees are, respectively, LKQ Italia's and each Euro Notes (2024) Guarantor’s senior unsecured obligations and are subordinated to all of LKQ Italia's and the Euro Notes (2024) Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2024) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2024) to the extent of the assets of those subsidiaries. The Euro Notes (2024) have been listed on the ExtraMOT, Professional Segment of the Borsa Italia S.p.A. securities exchange and the Global Exchange Market of Euronext Dublin. The Euro Notes (2024) are redeemable, in whole or in part, at any time at a redemption price of 100 % of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus a "make whole" premium. On or after January 1, 2024, we may redeem some or all of the Euro Notes (2024) at a redemption price of 100 % of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. We may be required to make an offer to purchase the Euro Notes (2024) upon the sale of certain assets, subject to certain exceptions, and upon a change of control. In addition, in the event of certain developments affecting taxation or under certain other circumstances which, in any case, require the payment of certain additional amounts, we may redeem the Euro Notes (2024) in whole, but not in part, at any time at a redemption price of 100 % 88 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS of the principal amount thereof plus accrued but unpaid interest, if any, and such certain additional amounts, if any, to the redemption date. Euro Notes (2026/28) On April 9, 2018, LKQ European Holdings B.V. ("LKQ Euro Holdings"), a wholly-owned subsidiary of LKQ Corporation, completed an offering of € 1,000 million aggregate principal amount of senior notes. The offering consisted of € 750 million senior notes due 2026 (the "Euro Notes (2026)") and € 250 million senior notes due 2028 (the "Euro Notes (2028)" and, together with the Euro Notes (2026), the "Euro Notes (2026/28)") in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering, together with borrowings under our senior secured credit facility, were used (i) to finance a portion of the consideration paid for the Stahlgruber acquisition, (ii) for general corporate purposes and (iii) to pay related fees and expenses, including the refinancing of net financial debt. The Euro Notes (2026/28) are governed by the Indenture dated as of April 9, 2018 (the “Euro Notes (2026/28) Indenture”) among LKQ Euro Holdings, LKQ Corporation and certain of our subsidiaries (the “Euro Notes (2026/28) Subsidiaries”), the trustee, paying agent, transfer agent, and registrar. On April 1, 2021, we redeemed the 3.625 % Euro Notes (2026) at a redemption price equal to 101.813 % of the principal amount of the Euro Notes (2026) plus accrued and unpaid interest thereon to, but not including, April 1, 2021. The total redemption payment was $ 915 million (€ 777 million), including an early-redemption premium of $ 16 million (€ 14 million) and accrued and unpaid interest of $ 16 million (€ 14 million). In the second quarter of 2021, we recorded a loss on debt extinguishment of $ 24 million related to the redemption due to the early-redemption premium and the write-off of the unamortized debt issuance costs. The Euro Notes (2028) bear interest at a rate of 4.125 % per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for. Interest on the Euro Notes (2028) is payable in arrears on April 1 and October 1 of each year. The Euro Notes (2028) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2028) Subsidiaries (the "Euro Notes (2028) Guarantors"). The Euro Notes (2028) and the related guarantees are, respectively, LKQ Euro Holdings' and each Euro Notes (2028) Guarantor’s senior unsecured obligations and will be subordinated to all of LKQ Euro Holdings' and the Euro Notes (2028) Guarantors’ existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2028) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2028) to the extent of the assets of those subsidiaries. The Euro Notes (2028) have been listed on the Global Exchange Market of Euronext Dublin. The Euro Notes (2028) are redeemable, in whole or in part, at any time at a redemption price of 100 % of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus a "make whole" premium. On or after April 1, 2023, we may redeem some or all of the Euro Notes (2028) at the applicable redemption prices set forth in the Euro Notes (2026/28) Indenture. We may be required to make an offer to purchase the Euro Notes (2028) upon the sale of certain assets, subject to certain exceptions, and upon a change of control. In addition, in the event of certain developments affecting taxation or under certain other circumstances which, in any case, require the payment of certain additional amounts, we may redeem the Euro Notes (2028) in whole, but not in part, at any time at a redemption price of 100 % of the principal amount thereof, plus accrued but unpaid interest, if any, and such certain additional amounts, if any, to the redemption date. Restricted Payments Our senior secured credit agreement and our senior notes indentures contain limitations on payment of cash dividends or other distributions of assets. Delaware law also imposes restrictions on dividend payments. Based on limitations in effect under the senior secured credit agreement, senior notes indentures and Delaware law, the maximum amount of dividends we could have paid as of December 31, 2021 was approximately $ 2,850 million . The limit on the payment of dividends is calculated using historical financial information and will change from period to period. These restrictions did not impact the payment of the dividend declared in October 2021 and paid in December 2021 and are not expected to impact future dividend payments. 89 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Receivables Securitization Facility On December 20, 2018, we amended the terms of our receivables securitization facility with Mitsubishi UFJ Financial Group, Inc.("MUFG") to: (i) extend the term of the facility to November 8, 2021; (ii) increase the maximum amount available to $ 110 million; and (iii) make other clarifying and updating changes. Under the facility, LKQ sold an ownership interest in certain receivables, related collections and security interests to MUFG for the benefit of conduit investors and/or financial institutions for cash proceeds. Effective July 30, 2021, we terminated the receivables securitization facility. There was no outstanding balance under the receivables securitization facility as of December 31, 2020. Net receivables totaling $ 121 million were collateral for the investments under the receivables facility as of December 31, 2020. Note 10. Derivative Instruments and Hedging Activities We are exposed to market risks, including the effect of changes in interest rates, foreign currency exchange rates and commodity prices. Under current policies, we may use derivatives to manage our exposure to variable interest rates on our senior secured debt and changing foreign exchange rates for certain foreign currency denominated transactions. We do not hold or issue derivatives for trading purposes. Cash Flow Hedges Through June 30, 2021, we held interest rate swap agreements to hedge a portion of the variable interest rate risk on the variable rate borrowings under our Credit Agreement, with the objective of minimizing the impact of interest rate fluctuations and stabilizing cash flows. Under the terms of the interest rate swap agreements, we paid the fixed interest rate and received payment at a variable rate of interest based on LIBOR for the respective currency of each interest rate swap agreement’s notional amount. Changes in the fair value of the interest rate swap agreements were recorded in Accumulated other comprehensive income (loss) and were reclassified to Interest expense when the underlying interest payment impacted earnings. At December 31, 2020, we held cross currency swaps, which contained an interest rate swap component and a foreign currency forward contract component that, combined with related intercompany financing arrangements, effectively converted variable rate U.S. dollar-denominated borrowings into fixed rate euro-denominated borrowings. The swaps were intended to minimize the impact of fluctuating exchange rates and interest rates on the cash flows resulting from the related intercompany financing arrangements. Changes in the fair value of the derivative instruments were recorded in Accumulated other comprehensive income (loss) and were reclassified to Interest expense and Interest income and Other (income) expense, net when the underlying transactions had an impact on earnings. From time to time, we may hold foreign currency forward contracts related to certain foreign currency denominated intercompany transactions, with the objective of minimizing the impact of fluctuating exchange rates on these future cash flows. Under the terms of the foreign currency forward contracts, we will sell the foreign currency in exchange for U.S. dollars at a fixed rate on the maturity dates of the contracts. Changes in the fair value of the foreign currency forward contracts where hedge accounting is applied are recorded in Accumulated other comprehensive income (loss) and reclassified to Other (income) expense, net when the underlying transaction has an impact on earnings. As of December 31, 2021, we held no cash flow hedges, and as of December 31, 2020, we held cash flow hedges with the following notional amounts (in thousands): December 31, 2020 Interest rate swap agreements USD denominated $ 480,000 Cross currency swap agreements Euro denominated € 340,000 Foreign currency forward contracts SEK denominated kr 227,000 90 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables summarize the fair values of the designated cash flow hedges as of December 31, 2020 (in thousands): Fair Value at December 31, 2020 Other Accrued Expenses Interest rate swap agreements $ 899 Cross currency swap agreements 56,328 Foreign currency forward contracts 1,350 Total cash flow hedges $ 58,577 While certain derivative instruments executed with the same counterparty were subject to master netting arrangements, we present our cash flow hedge derivative instruments on a gross basis on the Consolidated Balance Sheets. The impact of netting the fair values of these contracts would have no effect on the Consolidated Balance Sheet at December 31, 2020. The activity related to the cash flow hedges is included in Note 8, "Accumulated Other Comprehensive Income (Loss)." The activity related to the cash flow hedges is presented in either operating activities or financing activities in our Consolidated Statements of Cash Flows. Other Derivative Instruments Not Designated as Hedges To manage foreign currency exposure on non-functional currency denominated borrowings, we entered into short term foreign currency forward contracts. As of December 31, 2021, we held no foreign currency forward contracts related to non-functional currency denominated borrowings. At December 31, 2020, the notional amounts of foreign currency forward contracts related to non-functional currency denominated borrowings were € 142 million and £ 75 million. We elected not to apply hedge accounting for these transactions, and therefore the contracts were adjusted to fair value through the results of operations as of each balance sheet date. The fair values of these short-term derivative instruments were recorded in either Prepaid expenses and other current assets or Other accrued expenses on the Consolidated Balance Sheets. The fair values of these contracts at December 31, 2020, along with the effect on the results of operations during the years ended December 31, 2021 and 2020, were immaterial. We hold other short-term derivative instruments, including foreign currency forward contracts, to manage our exposure to variability in the cash flows related to inventory purchases denominated in a non-functional currency. We have elected not to apply hedge accounting for these transactions. The notional amount and fair value of these contracts as of December 31, 2021 and 2020, along with the effect on the results of operations, were immaterial. Note 11. Fair Value Measurements Financial Assets and Liabilities Measured at Fair Value We use the market and income approaches to estimate the fair value of our financial assets and liabilities, and during the year ended December 31, 2021, there were no significant changes in valuation techniques or inputs related to the financial assets or liabilities that we have historically recorded at fair value. The tiers in the fair value hierarchy include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. 91 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables present information about our financial liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation inputs we utilized to determine such fair value as of December 31, 2021 and December 31, 2020 (in thousands): Balance as of December 31, 2021 Fair Value Measurements as of December 31, 2021 Level 1 Level 2 Level 3 Liabilities: Contingent consideration liabilities $ 17,694 $ — $ — $ 17,694 Deferred compensation liabilities 88,961 — 88,961 — Total Liabilities $ 106,655 $ — $ 88,961 $ 17,694 Balance as of December 31, 2020 Fair Value Measurements as of December 31, 2020 Level 1 Level 2 Level 3 Liabilities: Contingent consideration liabilities $ 13,263 $ — $ — $ 13,263 Interest rate swaps 899 — 899 — Deferred compensation liabilities 76,240 — 76,240 — Cross currency swap agreements 56,328 — 56,328 — Foreign currency forward contracts 5,190 — 5,190 — Total Liabilities $ 151,920 $ — $ 138,657 $ 13,263 Plan investments in corporate-owned life insurance, which are intended to fund the deferred compensation liabilities, are recorded at their cash surrender value, not fair value, and therefore are not included above. The cash surrender value of life insurance assets was $ 90 million and $ 72 million as of December 31, 2021 and 2020, respectively. The current portion of contingent consideration liabilities is included in Other current liabilities on the Consolidated Balance Sheets; the noncurrent portion of deferred compensation liabilities and contingent consideration liabilities is included in Other noncurrent liabilities on the Consolidated Balance Sheets based on the expected timing of the related payments. The balance sheet classification of the interest rate swaps, cross currency swap agreements, and foreign currency forward contracts is presented in Note 10, "Derivative Instruments and Hedging Activities." Our Level 2 liabilities are valued using inputs from third parties and market observable data. We obtain valuation data for the deferred compensation liabilities from third party sources, which use quoted market prices, investment allocations and reportable trades. We value other derivative instruments using a third party valuation model that performs a discounted cash flow analysis based on the terms of the contracts and market observable inputs such as current and forward interest rates and current and forward foreign exchange rates. Our contingent consideration liabilities are related to our business acquisitions. Under the terms of the contingent consideration agreements, payments may be made at specified future dates depending on the performance of the acquired business subsequent to the acquisition. The liabilities for these payments are classified as Level 3 liabilities because the related fair value measurement, which is determined using an income approach, includes significant inputs not observable in the market. We also have equity investments recorded in Other noncurrent assets that are reported at fair value. We have used net asset value as a practical expedient to value these equity investments and thus they are excluded from the fair value hierarchy disclosure. Financial Assets and Liabilities Not Measured at Fair Value Our debt is reflected on the Consolidated Balance Sheets at cost. Based on market conditions as of both December 31, 2021 and 2020, the fair value of the credit agreement borrowings reasonably approximated the carrying values of $ 1,887 million and $ 967 million, respectively. As of December 31, 2021 and 2020, the fair values of the Euro Notes (2024) were approximately $ 605 million and $ 662 million, respectively, compared to carrying values of $ 569 million and $ 611 million, respectively. As of December 31, 2020, the fair value of the Euro Notes (2026) was $ 939 million compared to a carrying value of $ 916 million. The Euro Notes (2026) were paid off in 2021 and therefore were no longer outstanding as of December 31, 2021. As of 92 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2021 and 2020, the fair values of the Euro Notes (2028) were $ 301 million and $ 332 million, respectively, compared to carrying values of $ 284 million and $ 305 million, respectively. The fair value measurements of the borrowings under the credit agreement and receivables facility are classified as Level 2 within the fair value hierarchy since they are determined based upon significant inputs observable in the market, including interest rates on recent financing transactions with similar terms and maturities. We estimated the fair value by calculating the upfront cash payment a market participant would require at December 31, 2021 and 2020 to assume these obligations. The fair values of the Euro Notes (2024) and Euro Notes (2026/28) are determined based upon observable market inputs including quoted market prices in markets that are not active, and therefore are classified as Level 2 within the fair value hierarchy. Note 12. Leases We lease certain warehouses, distribution centers, retail stores, office space, land, vehicles and equipment. We determine if an arrangement is a lease at contract inception with lease right-of-use ("ROU") assets and lease liabilities being recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. In determining the present value of future lease payments, we use the incremental borrowing rate based on the information available at commencement date when the implicit rate is not readily determinable. We determine the incremental borrowing rate by analyzing yield curves with consideration of lease term, country and Company specific factors. In assessing the ROU asset, we include any lease prepayments and exclude lease incentives. We account for the lease and non-lease components of a contract as a single lease component and for leases with an initial term of 12 months or less, we have elected to not record an ROU asset and lease liability. In assessing the lease term, we include options to renew only when it is reasonably certain that the option will be exercised. For certain lease agreements, rental payments are adjusted periodically for inflation. Typically, these adjustments are considered variable lease costs. Other variable lease costs consist of certain non-lease components that are disclosed as lease costs due to our election of the practical expedient to combine lease and non-lease components and include items such as variable payments for utilities, property taxes, common area maintenance, sales taxes, and insurance. We guarantee the residual values for the majority of our leased vehicles. The residual values decline over the lease term to a defined percentage of original cost. In the event the lessor does not realize the residual value when a vehicle is sold, we would be responsible for a portion of the shortfall. Similarly, if the lessor realizes more than the residual value when a vehicle is sold, we would be paid the amount realized over the residual value. The amounts recorded on the Consolidated Balance Sheets as of December 31, 2021 and 2020 related to our lease agreements are as follows (in thousands): December 31, Leases Classification 2021 2020 Assets Operating lease ROU assets, net Operating lease assets, net $ 1,361,324 $ 1,353,124 Finance lease assets, net Property, plant and equipment, net 52,944 55,423 Total leased assets $ 1,414,268 $ 1,408,547 Liabilities Current Operating Current portion of operating lease liabilities $ 203,108 $ 221,811 Finance Current portion of long-term obligations 14,746 12,239 Noncurrent Operating Long-term operating lease liabilities, excluding current portion 1,209,218 1,197,963 Finance Long-term obligations, excluding current portion 36,810 45,097 Total lease liabilities $ 1,463,882 $ 1,477,110 93 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of lease expense are as follows (in thousands): Year Ended December 31, Lease Cost 2021 2020 2019 Operating lease cost $ 313,378 $ 309,797 $ 317,035 Short-term lease cost 9,037 6,568 9,392 Variable lease cost 96,931 97,599 95,899 Finance lease cost Amortization of leased assets 9,780 9,876 10,277 Interest on lease liabilities 2,361 1,785 1,546 Sublease income ( 2,883 ) ( 2,372 ) ( 1,640 ) Net lease cost $ 428,604 $ 423,253 $ 432,509 The future minimum lease commitments under our leases at December 31, 2021 are as follows (in thousands): Years Ending December 31, Operating leases Finance leases (1) Total 2022 $ 292,617 $ 16,574 $ 309,191 2023 258,449 10,067 268,516 2024 218,562 8,413 226,975 2025 187,264 6,084 193,348 2026 155,141 2,972 158,113 Thereafter 748,729 20,810 769,539 Future minimum lease payments 1,860,762 64,920 1,925,682 Less: Interest 448,436 13,364 461,800 Present value of lease liabilities $ 1,412,326 $ 51,556 $ 1,463,882 (1) Amounts are included in the scheduled maturities of long-term obligations in Note 9, "Long-Term Obligations". As of December 31, 2021, we had additional minimum operating lease payments for leases that have not yet commence d of $ 79 million . These operating leases will commence in the nex t 18 months with lease terms of 1 to 15 years. Most of these leases have not commenced because the assets are in the process of being constructed. Other information related to leases is as follows: December 31, Lease Term and Discount Rate 2021 2020 Weighted-average remaining lease term (years) Operating leases 9.4 9.7 Finance leases 8.9 9.0 Weighted-average discount rate Operating leases 5.2 % 5.3 % Finance leases 3.5 % 3.5 % Year Ended December 31, Supplemental cash flows information (in thousands) 2021 2020 2019 Cash paid for amounts included in the measurement of lease liabilities Operating cash outflows from operating leases $ 286,030 $ 299,260 $ 297,712 Financing cash outflows from finance leases 13,361 11,772 11,744 Leased assets obtained in exchange for finance lease liabilities 9,860 25,049 13,326 Leased assets obtained in exchange for operating lease liabilities (1) 248,480 244,073 231,454 94 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) The amounts disclosed for Leased assets obtained in exchange for operating lease liabilities for the years ended December 31, 2020 and 2019 in the supplemental disclosure of cash flows information includes immaterial corrections of $116 million and $87 million, respectively, to address an omission of the impact of lease modifications and terminations. Note 13. Employee Benefit Plans Defined Benefit Plans We have funded and unfunded defined benefit plans covering certain employee groups in the U.S. and various European countries. Local statutory requirements govern many of our European plans. The defined benefit plans are mostly closed to new participants and, in some cases, existing participants no longer accrue benefits. On June 28, 2019, we approved an amendment to terminate our U.S. Plan and to freeze all related benefit accruals, effective June 30, 2019. U.S. Plan participants were able to receive their full accrued benefits from plan assets by electing either lump sum distributions or annuity contracts with a qualifying third-party annuity provider. The resulting settlement effect of the U.S. Plan termination was determined based on prevailing market conditions, the lump sum offer participation rate of eligible participants, the actual lump sum distributions, and annuity purchase rates at the date of distribution. As a result of these elections, subsequent payments and annuity purchase cost to settle the plan obligations, we reclassified $ 6 million of unrealized loss from Accumulated other comprehensive loss to Interest income and other income, net in our Consolidated Statements of Income during the year ended December 31, 2020 to reflect the final settlement of the plan obligations. 95 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Funded Status The table below summarizes the funded status of the defined benefit plans (in thousands): December 31, 2021 2020 Change in projected benefit obligation: Projected benefit obligation - beginning of year $ 211,539 $ 225,388 Acquisitions and divestitures 643 ( 506 ) Service cost 4,645 3,565 Interest cost 1,354 2,740 Participant contributions 447 438 Actuarial (gain) / loss ( 11,251 ) 10,662 Benefits paid (1) ( 4,815 ) ( 6,841 ) Settlement (2) ( 1,815 ) ( 40,565 ) Transfers 6,300 — Currency impact ( 12,764 ) 16,658 Projected benefit obligation - end of year $ 194,283 $ 211,539 Change in fair value of plan assets: Fair value - beginning of year $ 58,962 $ 83,305 Actual return on plan assets 2,103 3,663 Employer contributions 5,017 14,028 Participant contributions 447 438 Benefits paid ( 4,666 ) ( 6,798 ) Settlement (2) ( 1,815 ) ( 40,565 ) Transfers 6,451 — Currency impact ( 3,524 ) 4,891 Fair value - end of year $ 62,975 $ 58,962 Funded status at end of year (liability) $ ( 131,308 ) $ ( 152,577 ) Accumulated benefit obligation $ 191,422 $ 208,712 (1) Includes amounts paid from plan assets as well as amounts paid from Company assets. (2) The 2020 amount reflects the settlement of the plan obligations for the U.S. Plan. The net amounts recognized for defined benefit plans in the Consolidated Balance Sheets were as follows (in thousands): December 31, 2021 2020 Current liabilities $ ( 4,816 ) $ ( 3,603 ) Non-current liabilities ( 126,492 ) ( 148,974 ) $ ( 131,308 ) $ ( 152,577 ) The following table summarizes the accumulated benefit obligation and aggregate fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets (in thousands): December 31, 2021 2020 Accumulated benefit obligation $ 191,422 $ 208,712 Aggregate fair value of plan assets 62,975 58,962 96 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the projected benefit obligation and aggregate fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets (in thousands): December 31, 2021 2020 Projected benefit obligation $ 194,283 $ 211,539 Aggregate fair value of plan assets 62,975 58,962 The table below summarizes the weighted-average assumptions used to calculate the year-end benefit obligations: 2021 2020 Discount rate used to determine benefit obligation 1.0 % 0.7 % Rate of future compensation increase 1.7 % 1.8 % Net Periodic Benefit Cost The table below summarizes the components of net periodic benefit cost for the defined benefit plans (in thousands): Year Ended December 31, 2021 2020 2019 Service cost $ 4,645 $ 3,565 $ 3,592 Interest cost 1,354 2,740 4,077 Expected return on plan assets (1) ( 1,667 ) ( 2,129 ) ( 2,337 ) Amortization of actuarial loss (gain) (2) 1,703 1,272 ( 404 ) Settlement (gain) loss ( 54 ) 5,654 ( 378 ) Net periodic benefit cost $ 5,981 $ 11,102 $ 4,550 (1) We use the fair value of our plan assets to calculate the expected return on plan assets. (2) Actuarial gains and losses are amortized using a corridor approach. Gains and losses are amortized if, as of the beginning of the year, the cumulative net gain or loss exceeds 10 percent of the greater of the projected benefit obligation or the fair value of the plan assets. Gains and losses in excess of the corridor are amortized over the average remaining service period of active members expected to receive benefits under the plan or, in the case of closed plans, the expected future lifetime of the employees participating in the plan. The service cost component of net periodic benefit cost was classified in Selling, general and administrative expenses, while the other components of net periodic benefit cost were classified in Interest income and other income, net in the Consolidated Statements of Income. The table below summarizes the weighted-average assumptions used to calculate the net periodic benefit cost in the table above: 2021 2020 2019 Discount rate used to determine service cost 0.4 % 0.7 % 1.3 % Discount rate used to determine interest cost 0.8 % 1.8 % 2.5 % Rate of future compensation increase 2.0 % 2.1 % 1.8 % Expected long-term return on plan assets (1) 3.2 % 2.9 % 3.1 % (1) Our expected long-term return on plan assets is determined based on the asset allocation and estimate of future long-term returns by asset class. Assumed mortality is also a key assumption in determining benefit obligations and net periodic benefit cost. In some of the European plans, a price inflation index is also an assumption in determining benefit obligations and net periodic benefit cost. As of December 31, 2021, the pre-tax amounts recognized in Accumulated other comprehensive loss consisted of $ 33 million of net actuarial losses for our defined benefit plans that have not yet been recognized in net periodic benefit cost. Of this amount, we expect $ 1 million to be recognized as a component of net periodic benefit cost during the year ending December 31, 2022. 97 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair Value of Plan Assets Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants. The tiers in the fair value hierarchy include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Investments that are valued using net asset value ("NAV") (or its equivalent) as a practical expedient are excluded from the fair value hierarchy disclosure. The following is a description of the valuation methodologies used for assets reported at fair value. The methodologies used at December 31, 2021 and 2020 are the same. Level 3 investments: Investments in insurance contracts represent the cash surrender value of the insurance policy. These are actuarially determined amounts based on projections of future benefit payments, discount rates, and expected long-term rate of return on assets. The remaining pension assets are valued at net asset value based on the underlying assets owned by the fund administrator, minus liabilities, divided by the number of units outstanding and are included in the table below to reconcile the total investment fair value of our plan assets. For the unfunded pension plans, we pay the defined benefit plan obligations when they become due. The table below summarizes the fair value of our defined benefit plan assets by asset category within the fair value hierarchy for the funded defined benefit pension plans (in thousands): December 31, 2021 2020 Level 1 Level 2 Level 3 NAV Total Level 1 Level 2 Level 3 NAV Total Insurance contracts $ — $ — $ 41,922 $ — $ 41,922 $ — $ — $ 44,753 $ — $ 44,753 Mutual fund (1) — — — 21,053 21,053 — — — 14,209 14,209 Total investments at fair value $ — $ — $ 41,922 $ 21,053 $ 62,975 $ — $ — $ 44,753 $ 14,209 $ 58,962 (1) The underlying assets of the mutual fund valued at NAV consist of international bonds, equity, real estate and other investments. The following table summarizes the changes in fair value measurements of Level 3 investments for the defined benefit plans (in thousands): December 31, 2021 2020 Balance at beginning of year $ 44,753 $ 40,676 Actual return on plan assets: Relating to assets held at the reporting date 1,449 1,394 Purchases, sales and settlements ( 1,170 ) ( 992 ) Currency impact ( 3,110 ) 3,675 Balance at end of year $ 41,922 $ 44,753 Assets for the defined benefit pension plans in Europe are invested primarily in insurance policies. Under these contracts, we pay premiums to the insurance company, which are based on an internal actuarial analysis performed by the insurance company; the insurance company then funds the pension payments to the plan participants upon retirement. Employer Contributions and Estimated Future Benefit Payments During the year ended December 31, 2021, we contributed $ 5 million to our pension plans. We estimate that contributions to our pension plans during 2022 will be $ 5 million. 98 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes estimated future benefit payments as of December 31, 2021 (in thousands): Years Ending December 31, Amount 2022 $ 4,879 2023 5,248 2024 5,399 2025 5,583 2026 6,166 2027 - 2031 34,526 Note 14. Income Taxes The provision for income taxes consists of the following components (in thousands): Year Ended December 31, 2021 2020 2019 Current: Federal $ 194,803 $ 155,887 $ 101,839 State 47,229 37,981 24,925 Foreign 115,656 89,123 81,081 Total current provision for income taxes $ 357,688 $ 282,991 $ 207,845 Deferred: Federal $ ( 2,603 ) $ ( 6,805 ) $ 22,173 State 433 ( 6,521 ) 6,376 Foreign ( 24,927 ) ( 20,167 ) ( 21,064 ) Total deferred (benefit) provision for income taxes $ ( 27,097 ) $ ( 33,493 ) $ 7,485 Provision for income taxes $ 330,591 $ 249,498 $ 215,330 Income taxes have been based on the following components of income from continuing operations before provision for income taxes (in thousands): Year Ended December 31, 2021 2020 2019 Domestic $ 978,226 $ 713,087 $ 616,842 Foreign 420,904 171,908 174,180 Income from continuing operations before provision for income taxes $ 1,399,130 $ 884,995 $ 791,022 The U.S. federal statutory rate is reconciled to the effective tax rate as follows: Year Ended December 31, 2021 2020 2019 U.S. federal statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of state credits and federal tax impact 2.7 % 3.2 % 3.2 % Impact of rates on international operations 1.2 % 1.9 % 1.4 % Change in valuation allowances ( 0.8 ) % 1.7 % 1.0 % Non-deductible expenses 0.4 % 0.8 % 0.9 % Excess tax benefits from stock-based compensation ( 0.1 ) % — % ( 0.3 ) % Other, net ( 0.8 ) % ( 0.4 ) % — % Effective tax rate 23.6 % 28.2 % 27.2 % 99 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Beginning in 2018, the Tax Act imposed a new regime of taxation on foreign subsidiary earnings, GILTI. We have elected to account for GILTI in the year the tax is incurred. As part of the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, the Tax Act imposed a one-time transition tax on the deemed repatriation of historical earnings of foreign subsidiaries as of December 31, 2017. Our transition tax liability was $ 42 million payable in 8 installments from 2018 through 2025. The next required installment of $ 3 million is recorded in Other current liabilities and the remaining $ 25 million is recorded in Other noncurrent liabilities on the Consolidated Balance Sheets. Undistributed earnings of our foreign subsidiaries amounted to approximately $ 1,151 million at December 31, 2021. Beginning in 2018, the Tax Act generally provided a 100% participation exemption from further U.S. taxation of dividends received from 10-percent or more owned foreign corporations held by U.S. corporate shareholders. Although foreign dividend income is generally exempt from U.S. federal tax in the hands of the U.S. corporate shareholders, either as a result of the participation exemption, or due to the previous taxation of such earnings under the transition tax and GILTI regime, companies must still apply the guidance of ASC 740: Income Taxes to account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. Further, the 2017 transition tax reduced a majority of the previous outside basis differences in our foreign subsidiaries, and most of any new differences arising have extensive interaction with the GILTI regime discussed above. Based on a review of our global financing and capital expenditure requirements as of December 31, 2021, we continue to plan to permanently reinvest the undistributed earnings of our international subsidiaries. Thus, no deferred U.S. income taxes or potential foreign withholding taxes have been recorded. Due to the complexity of the new U.S. tax regime, it remains impractical to estimate the amount of deferred taxes potentially payable were such earnings to be repatriated. The significant components of the deferred tax assets and liabilities are as follows (in thousands): December 31, 2021 2020 Deferred Tax Assets: Accrued expenses and reserves $ 76,183 $ 59,241 Qualified and nonqualified retirement plans 30,567 34,143 Inventory 10,810 15,591 Accounts receivable 18,205 15,449 Interest deduction carryforwards 31,677 34,485 Stock-based compensation 7,011 5,362 Operating lease liabilities 338,359 331,327 Net operating loss carryforwards 24,690 27,538 Other 25,220 24,961 Total deferred tax assets, gross 562,722 548,097 Less: valuation allowance ( 45,420 ) ( 60,275 ) Total deferred tax assets $ 517,302 $ 487,822 Deferred Tax Liabilities: Goodwill and other intangible assets $ 238,325 $ 229,330 Property, plant and equipment 93,499 95,007 Trade name 90,968 108,883 Operating lease assets, net 322,779 317,694 Other 19,086 11,364 Total deferred tax liabilities $ 764,657 $ 762,278 Net deferred tax liability $ ( 247,355 ) $ ( 274,456 ) 100 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred tax assets and liabilities are reflected on the Consolidated Balance Sheets as follows (in thousands): December 31, 2021 2020 Noncurrent deferred tax assets $ 31,941 $ 16,965 Noncurrent deferred tax liabilities 279,296 291,421 Noncurrent deferred tax assets and noncurrent deferred tax liabilities are included in Other noncurrent assets and Deferred income taxes, respectively, on the Consolidated Balance Sheets. We have net operating loss carryforwards, primarily for certain international tax jurisdictions, the tax benefits of which totaled approximately $ 25 million and $ 28 million at December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, we had tax credit carryforwards for certain U.S. state jurisdictions, the tax benefits of which totaled less than $ 1 million at both dates. As of December 31, 2021 and 2020, we had interest deduction carryforwards in Italy and Germany, the tax benefits of which totaled $ 32 million and $ 34 million, respectively. As of December 31, 2021 and 2020, we had a U.S. capital loss carryforward, the tax benefit of which totaled $ 4 million and $ 5 million, respectively. As of December 31, 2021 and 2020, valuation allowances of $ 45 million and $ 60 million, respectively, were recorded for deferred tax assets related to the foreign interest deduction carryforwards, the U.S. capital loss carryforward, and for certain foreign and U.S. net operating loss carryforwards. The $ 15 million net decrease in valuation allowances was primarily attributable to a $ 12 million valuation allowance release with regard to Germany interest deduction carryforwards. The net operating losses generally carry forward for an indefinite period. The interest deduction carryforwards in Italy and Germany do not expire. U.S. capital loss expires in 2022. Realization of these deferred tax assets is dependent on the generation of sufficient taxable income prior to the expiration dates, where applicable, or in the case of interest deduction carryforward, subject to legislative thin capitalization constraints, typically based on profitability. Based on historical and projected operating results, we believe that it is more likely than not that earnings will be sufficient to realize the deferred tax assets for which valuation allowances have not been provided. While we expect to realize the deferred tax assets, net of valuation allowances, changes in tax laws or in estimates of future taxable income may alter this expectation. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands): 2021 2020 2019 Balance at January 1 $ 2,308 $ 2,317 $ 1,237 Additions for acquired tax positions — — 1,376 Additions based on tax positions related to the current year 5 1,147 5 Additions based on tax positions related to prior years 4,364 — 45 Reductions for tax positions of prior year ( 1,601 ) — — Lapse of statutes of limitations ( 332 ) ( 297 ) ( 297 ) Settlements with taxing authorities — ( 958 ) — Cumulative translation adjustment ( 222 ) 99 ( 49 ) Balance at December 31 $ 4,522 $ 2,308 $ 2,317 Included in the balance of unrecognized tax benefits above as of December 31, 2021, 2020 and 2019, are approximately $ 4 million, $ 2 million and $ 2 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate. The balance of unrecognized tax benefits at December 31, 2021, 2020 and 2019, includes approximately $ 1 million of tax benefits that, if recognized, would result in adjustments to deferred taxes. We recognize interest and penalties accrued related to unrecognized tax benefits as income tax expense. Attributable to the unrecognized tax benefits noted above, we had accumulated interest and penalties of $ 1 million at December 31, 2021 and less than $ 1 million at December 31, 2020 and 2019, respectively. During the year ended December 31, 2021 and each of the years ended December 31, 2020 and 2019, $ 1 million and an immaterial amount, respectively, of interest and penalties were recorded through the income tax provision, prior to any reversals for lapses in the statutes of limitations. During the twelve months beginning January 1, 2022, it is reasonably possible that we will reduce unrecognized tax benefits by $ 1 million, an immaterial amount of which would impact our effective tax rate. 101 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company and/or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various U.S. state and international jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or international income tax examinations by tax authorities for years before 2015. Adjustments from examinations, if any, are not expected to have a material effect on our Consolidated Financial Statements. Note 15. Segment and Geographic Information We have four operating segments: Wholesale – North America, Europe, Specialty and Self Service. The Wholesale – North America and Self Service operating segments are aggregated into one reportable segment, North America, because they possess similar economic characteristics and have common products and services, customers, and methods of distribution. The reportable segments are organized based on a combination of geographic areas served and type of product lines offered. The reportable segments are managed separately as each business serves different customers (i.e., geographic in the case of North America and Europe and product type in the case of Specialty) and is affected by different economic conditions. Therefore, we present three reportable segments: North America, Europe and Specialty. The following tables present our financial performance by reportable segment for the periods indicated (in thousands): North America Europe Specialty Eliminations Consolidated Year Ended December 31, 2021 Revenue: Third Party $ 5,162,639 $ 6,061,948 $ 1,863,917 $ — $ 13,088,504 Intersegment 2,181 — 3,380 ( 5,561 ) — Total segment revenue $ 5,164,820 $ 6,061,948 $ 1,867,297 $ ( 5,561 ) $ 13,088,504 Segment EBITDA $ 944,465 $ 617,825 $ 223,149 $ — $ 1,785,439 Depreciation and amortization (1) 96,914 157,406 29,683 — 284,003 Year Ended December 31, 2020 Revenue: Third Party $ 4,631,306 $ 5,492,184 $ 1,505,340 $ — $ 11,628,830 Intersegment 1,033 — 3,655 ( 4,688 ) — Total segment revenue $ 4,632,339 $ 5,492,184 $ 1,508,995 $ ( 4,688 ) $ 11,628,830 Segment EBITDA $ 778,504 $ 427,582 $ 162,673 $ — $ 1,368,759 Depreciation and amortization (1) 97,390 172,927 29,180 — 299,497 Year Ended December 31, 2019 Revenue: Third Party $ 5,208,589 $ 5,838,124 $ 1,459,396 $ — $ 12,506,109 Intersegment 705 — 4,646 ( 5,351 ) — Total segment revenue $ 5,209,294 $ 5,838,124 $ 1,464,042 $ ( 5,351 ) $ 12,506,109 Segment EBITDA $ 712,957 $ 454,220 $ 161,184 $ — $ 1,328,361 Depreciation and amortization (1) 93,747 191,195 29,464 — 314,406 (1) Amounts presented include depreciation and amortization expense recorded within Cost of goods sold and Restructuring and acquisition related expenses. The key measure of segment profit or loss reviewed by our chief operating decision maker, our Chief Executive Officer, is Segment EBITDA. We use Segment EBITDA to compare profitability among the segments and evaluate business strategies. Segment EBITDA includes revenue and expenses that are controllable by the segment. Corporate general and administrative expenses are allocated to the segments based on usage, with shared expenses apportioned based on the segment's percentage of consolidated revenue. We calculate Segment EBITDA as EBITDA excluding restructuring and acquisition related expenses (which includes restructuring expenses recorded in Cost of goods sold); change in fair value of contingent consideration liabilities; other gains and losses related to acquisitions, equity method investments, or divestitures; equity in losses and earnings of unconsolidated subsidiaries; equity investment fair value adjustments; and impairment charges. EBITDA, which is the basis for Segment EBITDA, is calculated as net income attributable to LKQ stockholders excluding discontinued operations and discontinued noncontrolling interest, depreciation, amortization, interest (which includes gains and losses on debt extinguishment) and income tax expense. 102 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The table below provides a reconciliation of Net Income to Segment EBITDA (in thousands): Year Ended December 31, 2021 2020 2019 Net income $ 1,092,124 $ 640,414 $ 545,034 Less: net income attributable to continuing noncontrolling interest 1,251 1,888 2,800 Less: net income attributable to discontinued noncontrolling interest — 103 974 Net income attributable to LKQ stockholders 1,090,873 638,423 541,260 Subtract: Net income (loss) from discontinued operations 648 ( 95 ) 1,619 Net income attributable to discontinued noncontrolling interest — ( 103 ) ( 974 ) Net income from continuing operations attributable to LKQ stockholders 1,090,225 638,621 540,615 Add: Depreciation and amortization 259,992 272,292 290,770 Depreciation and amortization - cost of goods sold 23,099 21,672 21,312 Depreciation and amortization - restructuring expenses (1) 912 5,533 2,324 Interest expense, net of interest income 70,292 101,874 136,274 Loss (gain) on debt extinguishment 23,564 12,751 ( 128 ) Provision for income taxes 330,591 249,498 215,330 EBITDA 1,798,675 1,302,241 1,206,497 Subtract: Equity in earnings (losses) of unconsolidated subsidiaries (2) 22,937 5,012 ( 32,277 ) Equity investment fair value adjustments 10,841 — — Gain due to resolution of acquisition related matter — — 12,063 Gains on bargain purchases and previously held equity interests — — 1,157 Add: Restructuring and acquisition related expenses (1) 19,399 60,630 34,658 Restructuring expenses - cost of goods sold 93 7,141 20,654 Loss on disposal of businesses and impairment of net assets held for sale (3) 28 3,174 47,102 Change in fair value of contingent consideration liabilities 1,022 585 393 Segment EBITDA $ 1,785,439 $ 1,368,759 $ 1,328,361 (1) The sum of these two captions represents the total amount that is reported in Restructuring and acquisition related expenses in the Consolidated Statements of Income. Refer to Note 5, "Restructuring and Acquisition Related Expenses," for further information. (2) Refer to "Investments in Unconsolidated Subsidiaries" in Note 3, "Summary of Significant Accounting Policies," for further information. (3) Refer to "Net Assets Held for Sale" in Note 3, "Summary of Significant Accounting Policies," for further information. The following table presents capital expenditures by reportable segment (in thousands): Year Ended December 31, 2021 2020 2019 Capital Expenditures North America $ 129,174 $ 76,300 $ 131,643 Europe 141,009 85,039 121,596 Specialty 23,283 11,356 12,491 Total capital expenditures $ 293,466 $ 172,695 $ 265,730 103 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents assets by reportable segment (in thousands): December 31, 2021 2020 2019 Receivables, net North America $ 384,283 $ 386,289 $ 419,452 Europe 586,231 598,615 636,216 Specialty 102,258 88,485 75,464 Total receivables, net 1,072,772 1,073,389 1,131,132 Inventories North America 825,806 810,798 991,062 Europe 1,326,569 1,302,649 1,401,801 Specialty 458,140 301,165 379,914 Total inventories 2,610,515 2,414,612 2,772,777 Property, plant and equipment, net North America 628,472 583,985 610,573 Europe 576,846 583,439 538,951 Specialty 93,422 81,279 84,876 Total property, plant and equipment, net 1,298,740 1,248,703 1,234,400 Operating lease assets, net North America 762,773 755,430 768,164 Europe 515,103 520,131 457,035 Specialty 83,448 77,563 83,312 Total operating lease assets, net 1,361,324 1,353,124 1,308,511 Equity method investments North America 24,515 18,676 17,624 Europe 156,190 136,548 121,619 Total equity method investments 180,705 155,224 139,243 Other unallocated assets 6,082,098 6,115,481 6,193,893 Total assets $ 12,606,154 $ 12,360,533 $ 12,779,956 We report net receivables; inventories; net property, plant and equipment; net operating lease assets; and equity method investments by segment as that information is used by the chief operating decision maker in assessing segment performance. These assets provide a measure for the operating capital employed in each segment. Unallocated assets include cash and cash equivalents, prepaid and other current and noncurrent assets, goodwill and other intangibles. Our largest countries of operation are the U.S., followed by the U.K. and Germany. Additional European operations are located in the Netherlands, Italy, Czech Republic, Belgium, Austria, Slovakia, Poland, and other European countries. Our operations in other countries include wholesale operations in Canada, remanufacturing operations in Mexico, an aftermarket parts freight consolidation warehouse in Taiwan, and administrative support functions in India. Our net sales are attributed to geographic area based on the location of the selling operation. 104 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth our revenue by geographic area (in thousands): Year Ended December 31, 2021 2020 2019 Revenue United States $ 6,625,951 $ 5,755,437 $ 6,220,267 United Kingdom 1,647,865 1,460,600 1,599,074 Germany 1,621,961 1,522,529 1,578,543 Other countries 3,192,727 2,890,264 3,108,225 Total revenue $ 13,088,504 $ 11,628,830 $ 12,506,109 The following table sets forth our tangible long-lived assets by geographic area (in thousands): December 31, 2021 2020 2019 Long-lived assets United States $ 1,486,987 $ 1,419,113 $ 1,467,701 Germany 329,247 360,184 340,995 United Kingdom 304,790 315,333 330,113 Other countries 539,040 507,197 404,102 Total long-lived assets $ 2,660,064 $ 2,601,827 $ 2,542,911 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.