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 ) 60 Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020 63 Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021 and 2020 64 Consolidated Balance Sheets as of December 31, 2022 and 2021 65 Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020 66 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2022, 2021 and 2020 68 Notes to Consolidated Financial Statements 69 59 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, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 23, 2023, 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 $4.3 billion as of December 31, 2022 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. 60 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 23, 2023 We have served as the Company's auditor since 1998. 61 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, 2022, 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, 2022, 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, 2022, of the Company and our report dated February 23, 2023, 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 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 23, 2023 62 LKQ CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (In millions, except per share data) Year Ended December 31, 2022 2021 2020 Revenue $ 12,794 $ 13,089 $ 11,629 Cost of goods sold 7,571 7,767 7,036 Gross margin 5,223 5,322 4,593 Selling, general and administrative expenses 3,544 3,568 3,266 Restructuring and transaction related expenses 20 20 66 (Gain) on disposal of businesses and impairment of net assets held for sale ( 159 ) — 3 Depreciation and amortization 237 260 272 Operating income 1,581 1,474 986 Other expense (income): Interest expense 78 72 104 Loss on debt extinguishment — 24 13 Interest income and other income, net ( 15 ) ( 21 ) ( 16 ) Total other expense, net 63 75 101 Income from continuing operations before provision for income taxes 1,518 1,399 885 Provision for income taxes 385 331 250 Equity in earnings of unconsolidated subsidiaries 11 23 5 Income from continuing operations 1,144 1,091 640 Net income from discontinued operations 6 1 — Net income 1,150 1,092 640 Less: net income attributable to continuing noncontrolling interest 1 1 2 Net income attributable to LKQ stockholders $ 1,149 $ 1,091 $ 638 Basic earnings per share: (1) Income from continuing operations $ 4.13 $ 3.68 $ 2.10 Net income from discontinued operations 0.02 — — Net income 4.15 3.68 2.10 Less: net income attributable to continuing noncontrolling interest 0.01 — 0.01 Net income attributable to LKQ stockholders $ 4.15 $ 3.68 $ 2.10 Diluted earnings per share: (1) Income from continuing operations $ 4.12 $ 3.67 $ 2.10 Net income from discontinued operations 0.02 — — Net income 4.14 3.67 2.10 Less: net income attributable to continuing noncontrolling interest 0.01 — 0.01 Net income attributable to LKQ stockholders $ 4.13 $ 3.66 $ 2.09 (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. 63 LKQ CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (In millions) Year Ended December 31, 2022 2021 2020 Net income $ 1,150 $ 1,092 $ 640 Less: net income attributable to continuing noncontrolling interest 1 1 2 Net income attributable to LKQ stockholders 1,149 1,091 638 Other comprehensive (loss) income: Foreign currency translation, net of tax ( 212 ) ( 64 ) 114 Net change in unrealized gains/losses on cash flow hedges, net of tax — 1 ( 6 ) Net change in unrealized gains/losses on pension plans, net of tax 35 9 ( 1 ) Other comprehensive income (loss) from unconsolidated subsidiaries 7 — ( 5 ) Other comprehensive (loss) income ( 170 ) ( 54 ) 102 Comprehensive income 980 1,038 742 Less: comprehensive income attributable to continuing noncontrolling interest 1 1 2 Comprehensive income attributable to LKQ stockholders $ 979 $ 1,037 $ 740 The accompanying notes are an integral part of the Consolidated Financial Statements. 64 LKQ CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (In millions, except per share data) December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 278 $ 274 Receivables, net 998 1,073 Inventories 2,752 2,611 Prepaid expenses and other current assets 230 296 Total current assets 4,258 4,254 Property, plant and equipment, net 1,236 1,299 Operating lease assets, net 1,227 1,361 Goodwill 4,319 4,540 Other intangibles, net 653 746 Equity method investments 141 181 Other noncurrent assets 204 225 Total assets $ 12,038 $ 12,606 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,339 $ 1,176 Accrued expenses: Accrued payroll-related liabilities 218 261 Refund liability 109 107 Other accrued expenses 294 271 Current portion of operating lease liabilities 188 203 Current portion of long-term obligations 34 35 Other current liabilities 89 112 Total current liabilities 2,271 2,165 Long-term operating lease liabilities, excluding current portion 1,091 1,209 Long-term obligations, excluding current portion 2,622 2,777 Deferred income taxes 280 279 Other noncurrent liabilities 283 365 Commitments and contingencies Redeemable noncontrolling interest 24 24 Stockholders' equity: Common stock, $ 0.01 par value, 1,000.0 shares authorized, 322.4 shares issued and 267.3 shares outstanding at December 31, 2022; 321.6 shares issued and 287.0 shares outstanding at December 31, 2021 3 3 Additional paid-in capital 1,506 1,474 Retained earnings 6,656 5,794 Accumulated other comprehensive loss ( 323 ) ( 153 ) Treasury stock, at cost; 55.1 shares at December 31, 2022 and 34.6 shares at December 31, 2021 ( 2,389 ) ( 1,346 ) Total Company stockholders' equity 5,453 5,772 Noncontrolling interest 14 15 Total stockholders' equity 5,467 5,787 Total liabilities and stockholders' equity $ 12,038 $ 12,606 The accompanying notes are an integral part of the Consolidated Financial Statements. 65 LKQ CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (In millions) Year Ended December 31, 2022 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,150 $ 1,092 $ 640 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 264 284 299 (Gain) on disposal of businesses and impairment of net assets held for sale ( 159 ) — 3 Stock-based compensation expense 38 34 29 Loss on debt extinguishment — 24 13 Deferred income taxes 6 ( 27 ) ( 34 ) Other ( 14 ) ( 37 ) ( 4 ) Changes in operating assets and liabilities, net of effects from acquisitions and dispositions: Receivables, net ( 16 ) ( 16 ) 94 Inventories ( 342 ) ( 235 ) 433 Prepaid income taxes/income taxes payable 33 ( 65 ) 35 Accounts payable 269 283 ( 64 ) Other operating assets and liabilities 21 30 — Net cash provided by operating activities 1,250 1,367 1,444 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ( 222 ) ( 293 ) ( 173 ) Proceeds from disposals of property, plant and equipment 9 20 17 Acquisitions, net of cash acquired ( 4 ) ( 124 ) ( 7 ) Proceeds from disposals of businesses 399 7 5 Other investing activities, net ( 10 ) ( 29 ) ( 8 ) Net cash provided by (used in) investing activities 172 ( 419 ) ( 166 ) CASH FLOWS FROM FINANCING ACTIVITIES: Early-redemption premium — ( 16 ) ( 9 ) Repayment of Euro Notes (2026) — ( 883 ) — Repayment of U.S. Notes (2023) — — ( 600 ) Borrowings under revolving credit facilities 1,644 5,035 841 Repayments under revolving credit facilities ( 1,675 ) ( 3,717 ) ( 1,473 ) Repayments under term loans — ( 324 ) ( 18 ) Borrowings under receivables securitization facility — — 111 Repayments under receivables securitization facility — — ( 111 ) Repayments of other debt, net ( 17 ) ( 26 ) ( 116 ) Settlement of derivative instruments, net — ( 89 ) — Dividends paid to LKQ stockholders ( 284 ) ( 73 ) — Purchase of treasury stock ( 1,040 ) ( 877 ) ( 117 ) Other financing activities, net ( 22 ) ( 15 ) ( 21 ) Net cash used in financing activities ( 1,394 ) ( 985 ) ( 1,513 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 24 ) ( 1 ) 12 Net increase (decrease) in cash, cash equivalents and restricted cash 4 ( 38 ) ( 223 ) Cash and cash equivalents of continuing operations, beginning of period (1) 274 312 528 Add: Cash and cash equivalents of discontinued operations, beginning of period — — 7 Cash and cash equivalents of continuing and discontinued operations, beginning of period 274 312 535 Cash and cash equivalents, end of period $ 278 $ 274 $ 312 (1) The balance as of January 1, 2020 included restricted cash of $ 5 million. The accompanying notes are an integral part of the Consolidated Financial Statements. 66 LKQ CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (In millions) Year Ended December 31, 2022 2021 2020 Supplemental disclosure of cash paid for: Income taxes, net of refunds $ 346 $ 423 $ 248 Interest 71 76 107 The accompanying notes are an integral part of the Consolidated Financial Statements. 67 LKQ CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (In millions, except per share data) LKQ Stockholders Common Stock Treasury Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Noncontrolling Interest Total Stockholders' Equity Shares Amount Shares Amount Balance as of December 31, 2019 319.9 $ 3 ( 13.2 ) $ ( 352 ) $ 1,418 $ 4,141 $ ( 201 ) $ 40 $ 5,049 Net income — — — — — 638 — 2 640 Other comprehensive income — — — — — — 102 — 102 Purchase of treasury stock — — ( 4.1 ) ( 117 ) — — — — ( 117 ) Vesting of restricted stock units, net of shares withheld for employee tax 0.9 — — — ( 3 ) — — — ( 3 ) Stock-based compensation expense — — — — 29 — — — 29 Exercise of stock options 0.1 — — — 1 — — — 1 Capital contributions from, net of dividends declared to, noncontrolling interest shareholder — — — — — — — ( 4 ) ( 4 ) Adoption of ASU 2016-13 — — — — — ( 3 ) — — ( 3 ) Disposition of subsidiary with noncontrolling interests (see Note 2) — — — — — — — ( 11 ) ( 11 ) Purchase of noncontrolling interests (see Note 8) — — — — ( 1 ) — — ( 11 ) ( 12 ) Balance as of December 31, 2020 320.9 $ 3 ( 17.3 ) $ ( 469 ) $ 1,444 $ 4,776 $ ( 99 ) $ 16 $ 5,671 Net income — — — — — 1,091 — 1 1,092 Other comprehensive loss — — — — — — ( 54 ) — ( 54 ) Purchase of treasury stock — — ( 17.3 ) ( 877 ) — — — — ( 877 ) Vesting of restricted stock units, net of shares withheld for employee tax 0.7 — — — ( 4 ) — — — ( 4 ) Stock-based compensation expense — — — — 34 — — — 34 Dividends declared to LKQ stockholders ($0.25 per share) — — — — — ( 73 ) — — ( 73 ) Capital contributions from, net of dividends declared to, noncontrolling interest shareholder — — — — — — — ( 2 ) ( 2 ) Balance as of December 31, 2021 321.6 $ 3 ( 34.6 ) $ ( 1,346 ) $ 1,474 $ 5,794 $ ( 153 ) $ 15 $ 5,787 Net income — — — — — 1,149 — 1 1,150 Other comprehensive loss — — — — — — ( 170 ) — ( 170 ) Purchase of treasury stock — — ( 20.5 ) ( 1,043 ) — — — — ( 1,043 ) Vesting of restricted stock units, net of shares withheld for employee tax 0.8 — — — ( 6 ) — — — ( 6 ) Stock-based compensation expense — — — — 38 — — — 38 Dividends declared to LKQ stockholders ($1.025 per share) — — — — — ( 287 ) — — ( 287 ) Capital contributions from, net of dividends declared to, noncontrolling interest shareholder — — — — — — — ( 1 ) ( 1 ) Foreign currency translation adjustment on noncontrolling interest — — — — — — — ( 1 ) ( 1 ) Balance as of December 31, 2022 322.4 $ 3 ( 55.1 ) $ ( 2,389 ) $ 1,506 $ 6,656 $ ( 323 ) $ 14 $ 5,467 The accompanying notes are an integral part of the Consolidated Financial Statements. 68 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 U.K., 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, each of which is presented as a reportable segment. Beginning in 2022, the Wholesale - North America and Self Service operating segment results were separated from the previous reportable segment, North America, and each of Wholesale - North America and Self Service is now a separate reportable segment. Segment results have been adjusted retrospectively to reflect this change. Note 2. Discontinued Operations and Divestitures Glass Manufacturing Business In March 2017, we completed the sale of the PGW Auto Glass ("PGW") glass manufacturing business to a subsidiary of Vitro S.A.B. de C.V. ("Vitro"). In connection with the sale, LKQ and Vitro entered into a three-year Purchase and Supply Agreement in which our aftermarket automotive glass distribution business agreed to source various products from Vitro's glass manufacturing business for a three-year period beginning in March 2017 and ending in February 2020. All purchases from Vitro, including those outside of the Purchase and Supply Agreement, for the two months ended February 29, 2020 were $ 4 million. For the year ended December 31, 2022, we recorded to discontinued operations a $ 5 million benefit primarily related to the reassessment of a previously recorded valuation allowance on a deferred tax asset. For the year ended December 31, 2021, we recorded an insignificant gain related to the settlement of certain tax matters with Vitro. Czech Republic In February 2020, we completed the sale of the Czech Republic business of Stahlgruber GmbH ("Stahlgruber"), resulting in an immaterial loss on the sale. 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 insignificant amount of net income (excluding the loss on sale) from discontinued operations related to the business, of which an insignificant amount was attributable to the noncontrolling interest. Other Divestitures (Not Classified in Discontinued Operations) In April 2022, we completed the sale of our PGW aftermarket glass business within our Wholesale - North America segment, to a third party for $ 361 million resulting in recognition of a $ 155 million pretax gain ($ 127 million after tax). In September 2022, we completed the sale of a business within our Self Service segment, to a third party, resulting in proceeds of $ 25 million and the recognition of a $ 4 million pretax gain ($ 3 million after tax). In May 2020, we completed the sale of a non-core telecommunications operation within our Europe segment, resulting in proceeds of $ 4 million and the recognition of an insignificant loss on sale. 69 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3. Summary of Significant Accounting Policies Basis of Presentation The Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("US GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission. In the current year, we changed the presentation of our Consolidated Financial Statements from thousands to millions and, as a result, any necessary rounding adjustments have been made to prior year disclosed amounts. 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, 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. Foreign Currency Translation Our reporting currency is the U.S. dollar. For most of our international 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. Revenue Recognition We recognize revenue when a sales arrangement with a customer exists (e.g., contract, purchase orders, others), the transaction price is fixed or determinable and we have satisfied its performance obligations per the sales arrangement. The majority of our revenue originates from contracts with a single performance obligation to deliver parts, whereby the performance obligation is satisfied when control of the parts is transferred to the customer per the arranged shipping terms. Some of our contracts contain a combination of delivering parts and performing services, which are distinct and accounted for as separate performance obligations. Revenue for the service component is recognized as the services are rendered. Our revenue is measured at the determinable transaction price, net of any variable considerations granted to customers. Variable considerations include the right to return parts, discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items. These variable considerations are estimated throughout the year based on various factors, including contract terms, historical experience and performance levels. Sales tax and other tax amounts collected from customers for remittance to governmental authorities are excluded from revenue in the Consolidated Statements of Income and are shown as a current liability on the Consolidated Balance Sheets until remitted. Any incremental costs to obtain a contract (commissions earned by our sales representatives on product sales) are expensed when incurred, as the amortization period of the asset would be one year or less due to the short-term nature of our contracts. 70 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, refurbished and manufactured 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. 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 Gross margin in the Consolidated Statements of Income. Stock-Based Compensation For the restricted stock units ("RSUs") that contain both a performance-based vesting condition and a time-based vesting condition, we recognize compensation expense using the accelerated attribution method, pursuant to which expense is recognized straight-line over the requisite service period for each separate vesting tranche of the award. 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. For performance-based RSUs ("PSUs"), the 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. The impacts of forfeitures on RSUs and PSUs expense are recorded as they occur. Government Assistance Financial assistance received from governments is recorded during the period in which we incur the costs that the assistance is intended to offset, only if it is probable that we will meet the conditions required under the terms of the assistance. 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. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, operating accounts, and deposits readily convertible to known amounts of cash. 71 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Allowance for Credit Losses Receivables, net are reported net of an allowance for credit losses. The allowance is measured on a pool basis when similar risk characteristics exist, and a loss-rate for each pool is determined using historical credit loss experience as the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current conditions (e.g. management's evaluation of the aging of customer receivable balances and the financial condition of our customers) as well as changes in forecasted macroeconomic conditions, such as changes in the unemployment rate, gross domestic product growth rate or credit default rates. Concentrations of Credit Risks 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 stated 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. The cost of our inventory is determined differently based on the category of inventory; (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 aftermarket products, cost is established based on the average price paid for parts. 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. Aftermarket automotive glass products, which we no longer stock after the sale of PGW in 2022, were costed using the first-in first-out method. Refurbished products are parts that require cosmetic repairs, such as wheels, bumper covers and lights; we will apply new parts, products or materials to these parts 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. Salvage product 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 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. Manufactured product cost is established using the first-in first-out method. Property, Plant and Equipment Property, plant and equipment are recorded at cost less accumulated depreciation. 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. 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 transaction 72 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS related expenses in the Consolidated Statements of Income. All other depreciation expense is reported in Depreciation and amortization in the Consolidated Statements of Income. Expenditures for major additions and improvements that extend the useful life of the related asset are capitalized. Expenditures for maintenance and repairs are recorded as incurred to Selling, general and administrative expenses in the Consolidated Statements of Income. 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. 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 and indefinite-lived intangible assets are tested for impairment at least annually. We performed annual impairment tests during the fourth quarters of 2022, 2021 and 2020. Goodwill and indefinite-lived intangible assets 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 goodwill 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 and indefinite-lived intangible assets impairment test performed in the fourth quarter of 2022, we determined no impairment existed. The goodwill reporting units had a fair value estimate which exceeded the carrying value by at least 40%. Leases 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. Net Assets Held for Sale 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 are based on projected discounted cash flows and/or estimated selling prices. Management's assumptions for the discounted cash flow analyses of the businesses are 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, 2022. As of December 31, 2022 and 2021, assets and liabilities held for sale were insignificant. For the year ended December 31, 2020, we recorded net impairment charges totaling $ 3 million on our net assets held for sale. 73 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. There were no material impairments to the carrying value of long-lived assets during the years ended December 31, 2022, 2021 or 2020. Equity Method Investments We account for our investments in unconsolidated subsidiaries using the equity method of accounting, as our investments give us the ability to exercise significant influence, but not control, over the investee. Under the equity method of accounting, the initial investment is recorded at cost and the investment is subsequently adjusted for its proportionate share of earnings or losses and dividends, including consideration of basis differences resulting from the difference between the initial carrying amount of the investment and the underlying equity in net assets, as applicable. Warranty Reserve Assurance-type warranties are not considered a separate performance obligation, and thus no transaction price is allocated to them. 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. We record warranty costs in Cost of goods sold in our Consolidated Statements of Income. 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. The current portion of total self-insurance reserves is recorded in Other accrued expenses on the Consolidated Balance Sheet with the noncurrent portion is recorded in Other noncurrent liabilities on the Consolidated Balance Sheet, which reflects management's estimates of when claims will be paid. 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. Treasury Stock We record common stock purchased for treasury stock at cost. Recent Accounting Pronouncements Recently Issued Accounting Pronouncements In September 2022, the Financial Accounting Standards Board issued Accounting Standards Update No. 2022-04, “Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations” ("ASU 2022-04"), which requires the buyer in a supplier finance program to disclose certain information about their program, including key terms, balance sheet presentation of amounts, outstanding amounts at the end of each period, and rollforwards of balances. ASU 2022-04 is effective for fiscal years beginning after December 15, 2022 on a retrospective basis, including interim periods within those fiscal years, except for the disclosure of rollforward information, which is effective prospectively for fiscal years beginning after December 15, 2023. We are currently evaluating the impact ASU 2022-04 will have on our Consolidated Financial Statements and will adopt ASU 2022-04 for all reporting periods in 2023. 74 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4. Inventories We classify our inventory into the following categories: (i) aftermarket and refurbished products, (ii) salvage and remanufactured products, and (iii) manufactured products. Inventories consist of the following (in millions): December 31, 2022 2021 Aftermarket and refurbished products $ 2,279 $ 2,168 Salvage and remanufactured products 427 406 Manufactured products 46 37 Total inventories $ 2,752 $ 2,611 Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of December 31, 2022, manufactured products inventory was composed of $ 26 million of raw materials, $ 5 million of work in process, and $ 15 million of finished goods. As of December 31, 2021, manufactured products inventory was composed of $ 27 million of raw materials, $ 4 million of work in process, and $ 5 million of finished goods. Note 5. Property, Plant and Equipment Property, plant and equipment consists of the following (in millions): December 31, Useful Life 2022 2021 Land and improvements 10 - 20 years (1) $ 217 $ 204 Buildings and improvements 20 - 40 years 409 415 Machinery and equipment 3 - 20 years 776 739 Computer equipment and software 3 - 10 years 124 115 Vehicles and trailers 3 - 10 years 141 145 Furniture and fixtures 5 - 7 years 61 58 Leasehold improvements 1 - 20 years 398 350 Finance lease assets 107 101 2,233 2,127 Less—Accumulated depreciation ( 1,049 ) ( 987 ) Construction in progress 52 159 Total property, plant and equipment, net $ 1,236 $ 1,299 (1) Only applies to land improvements as land is not depreciated. Total depreciation expense for the years ended December 31, 2022, 2021, and 2020 was $ 169 million, $ 180 million, and $ 180 million, respectively. Supplemental disclosure of noncash investing activities is as follows (in millions): Year Ended December 31, 2022 2021 2020 Noncash property, plant and equipment additions in accounts payable and other accrued expenses $ 17 $ 14 $ 19 75 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6. Self-Insurance Reserves To provide for the potential liabilities for certain risks, we use a combination of insurance and self-insurance mechanisms, including a consolidated, wholly-owned captive insurance subsidiary which provides insurance coverage for workers' compensation and automotive liability claim payments that are below our deductibles under our third-party policies. The activity related to our captive insurance subsidiary was not significant for the year ended December 31, 2022. Total self-insurance reserves were $ 126 million and $ 117 million, of which $ 62 million and $ 61 million were classified as current, as of December 31, 2022 and 2021, respectively. We had outstanding letters of credit of $ 69 million at both December 31, 2022 and 2021, 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. Note 7. Allowance for Credit Losses Our reserve for expected credit losses was $ 54 million and $ 53 million as of December 31, 2022 and December 31, 2021, respectively. The provision for credit losses was an expense of $ 9 million, benefit of $ 5 million, and expense of $ 25 million for the years ended December 31, 2022, 2021, and 2020, respectively. A roll-forward of our allowance for credit losses is as follows (in millions): 2022 2021 Balance as of January 1, $ 53 $ 70 Provision for (benefit from) credit losses 9 ( 5 ) Write-offs ( 2 ) ( 8 ) Impact of foreign currency ( 6 ) ( 4 ) Balance as of December 31, $ 54 $ 53 Note 8. Noncontrolling Interest In October 2020, we purchased all of the noncontrolling interest of a subsidiary in our Self Service 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. We present redeemable noncontrolling interest on our balance sheet related to redeemable shares issued to a minority shareholder in conjunction with a previous acquisition. The 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 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. 76 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9. Intangible Assets The changes in the carrying amount of goodwill by reportable segment is as follows (in millions): North America Europe Specialty Self Service Total Balance as of January 1, 2021, gross $ 1,472 $ 2,458 $ 413 $ 282 $ 4,625 Accumulated impairment losses as of January 1, 2021 ( 33 ) — — — ( 33 ) Balance as of January 1, 2021 1,439 2,458 413 282 4,592 Business acquisitions and adjustments to previously recorded goodwill 23 18 43 — 84 Exchange rate effects 1 ( 137 ) — — ( 136 ) Balance as of December 31, 2021 $ 1,463 $ 2,339 $ 456 $ 282 $ 4,540 Business acquisitions and adjustments to previously recorded goodwill — 7 — — 7 Disposal of businesses ( 58 ) — — ( 7 ) ( 65 ) Exchange rate effects ( 8 ) ( 155 ) — — ( 163 ) Balance as of December 31, 2022 $ 1,397 $ 2,191 $ 456 $ 275 $ 4,319 The components of other intangibles, net are as follows (in millions): December 31, 2022 December 31, 2021 Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net Trade names and trademarks $ 489 $ ( 194 ) $ 295 $ 514 $ ( 175 ) $ 339 Customer and supplier relationships 479 ( 340 ) 139 604 ( 425 ) 179 Software and other technology related assets 361 ( 223 ) 138 345 ( 198 ) 147 Covenants not to compete 6 ( 6 ) — 13 ( 13 ) — Total finite-lived intangible assets 1,335 ( 763 ) 572 1,476 ( 811 ) 665 Indefinite-lived trademarks 81 — 81 81 — 81 Total other intangible assets $ 1,416 $ ( 763 ) $ 653 $ 1,557 $ ( 811 ) $ 746 Estimated 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 $ 95 million, $ 104 million, and $ 119 million during the years ended December 31, 2022, 2021, and 2020, respectively. Estimated amortization expense for each of the five years in the period ending December 31, 2027 is $ 88 million, $ 77 million, $ 69 million, $ 62 million and $ 52 million, respectively. 77 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10. Equity Method Investments The carrying value of our Equity method investments were as follows (in millions): Segment Ownership as of December 31, 2022 December 31, 2022 December 31, 2021 MEKO AB (1)(2)(3) Europe 26.6 % $ 129 $ 145 Other (4) 12 36 Total $ 141 $ 181 (1) As of December 31, 2022, the Level 1 fair value of our investment in MEKO AB ("Mekonomen") was $ 154 million based on the quoted market price for Mekonomen's common stock using the same foreign exchange rate as the carrying value. (2) As of December 31, 2022, our share of the book value of Mekonomen's net assets exceeded the book value of our investment by $ 8 million; this difference is primarily related to Mekonomen's Accumulated Other Comprehensive Income balance as of our acquisition date in 2016. We record our equity in the net earnings of Mekonomen on a one quarter lag. (3) During the second quarter of 2022, we received a $ 3 million dividend payment from Mekonomen. (4) In June 2022, we sold an investment in our Self Service segment resulting in a decrease to the carrying value of $ 22 million, recognizing an insignificant gain upon sale. Note 11. Government Assistance During the years ended December 31, 2022, 2021 and 2020, we recorded financial assistance from foreign governments, primarily in the form of grants, as credits in the following amounts (in millions): Year Ended December 31, 2022 2021 2020 Cost of goods sold $ — $ 1 $ 1 Selling, general and administrative expenses — 15 51 Total government assistance $ — $ 16 $ 52 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. We did not receive material grants for the year ended December 31, 2022. Note 12. Warranty Reserve Some of our salvage mechanical products are sold with a standard six month warranty against defects. Additionally, some of our remanufactured engines are sold with a standard three or four year warranty against defects. We also provide a limited lifetime warranty for certain of our aftermarket products. The changes in the warranty reserve are as follows (in millions): Warranty Reserve Balance as of January 1, 2021 $ 28 Warranty expense 74 Warranty claims ( 72 ) Balance as of December 31, 2021 $ 30 Warranty expense 77 Warranty claims ( 75 ) Balance as of December 31, 2022 $ 32 78 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13. Revenue Recognition Disaggregated Revenue We report revenue in two categories: (i) parts and services and (ii) other. Parts revenue is generated from the sale of vehicle products including replacement parts, components and systems used in the repair and maintenance of vehicles and specialty products and accessories to improve the performance, functionality and appearance of vehicles. Services revenue includes (i) additional services that are generally billed concurrently with the related product sales, such as the sale of service-type warranties, (ii) fees for admission to our self service yards, and (iii) diagnostic and repair services. For Wholesale - North America and Self Service, vehicle replacement products include sheet metal collision parts such as doors, hoods, and fenders; bumper covers; head and tail lamps; mirrors; grilles; wheels; and large mechanical items such as engines and transmissions. For Europe, vehicle replacement products include a wide variety of small mechanical products such as brake pads, discs and sensors; clutches; electrical products such as spark plugs and batteries; steering and suspension products; filters; and oil and automotive fluids. For our Specialty operations, we serve seven product segments: truck and off-road; speed and performance; recreational vehicles; towing; wheels, tires and performance handling; marine; and miscellaneous accessories. Other revenue 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 in both our Wholesale - North America and Self Service segments, including vehicles that have been used in our recycling operations and vehicles from OEMs and other entities that contract with us for secure disposal of "crush only" vehicles. Revenue from the sale of hulks in our Wholesale - North America and Self Service segments is recognized based on a price per ton of delivered material when the customer (processor) collects the scrap. The following table sets forth our revenue disaggregated by category and reportable segment (in millions): Year Ended December 31, 2022 2021 2020 Wholesale - North America $ 4,207 $ 4,037 $ 3,786 Europe 5,711 6,033 5,470 Specialty 1,788 1,864 1,505 Self Service 227 207 203 Parts and services 11,933 12,141 10,964 Wholesale - North America 349 339 253 Europe 24 29 22 Self Service 488 580 390 Other revenue 861 948 665 Total revenue $ 12,794 $ 13,089 $ 11,629 Contract Liabilities Our service-type warranties typically have service periods ranging from 6 months to 36 months. Proceeds from these service-type warranties are deferred at contract inception and amortized on a straight-line basis to revenue over the contract period. The current portion of deferred service-type warranties are included in Other current liabilities on the Consolidated Balance Sheets and the noncurrent portion of deferred service-type warranties are included in Other noncurrent liabilities on the Consolidated Balance Sheets based on the length of the underlying service period. The balances for deferred service-type warranties are as follows (in millions): December 31, 2022 2021 Deferred service-type warranties $ 33 $ 32 79 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Revenue by Geographic Area See Note 24, "Segment and Geographic Information" for information related to our revenue by geographic region. Variable Consideration Amounts related to variable consideration on our Consolidated Balance Sheets are as follows (in millions): December 31, Classification 2022 2021 Return asset Prepaid expenses and other current assets $ 58 $ 58 Refund liability Refund liability 109 107 Variable consideration reserve Receivables, net 136 144 Note 14. Restructuring and Transaction Related Expenses From time to time, we initiate restructuring plans to integrate acquired businesses, to align our workforce with strategic business activities, or to improve efficiencies in our operations. Below is a summary of our current restructuring plans: 2022 Global Restructuring Plan In the fourth quarter of 2022, we began a restructuring initiative covering all of our reportable segments designed to reduce costs, streamline operations, consolidate facilities and implement other strategic changes to the overall organization. We have incurred and expect to incur costs primarily for employee severance, inventory or other asset write-downs, and exiting facilities. This plan is scheduled to be substantially complete by 2024 with an estimated total incurred cost of between $ 30 million and $ 40 million. 1 LKQ Europe Plan In 2019, we announced a multi-year plan 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 plan, we are reorganizing our non-customer-facing teams and support systems through various projects including the implementation of a common ERP platform, rationalization of our product portfolio, and creation of a Europe headquarters office and central back office. We completed the organizational design and implementation projects in June 2021, with the remaining projects scheduled to be completed by the end of 2025 with a total incurred cost of between $ 30 million and $ 40 million. 2019/2020 Global Restructuring Plan In 2019, we commenced a cost reduction initiative, covering all of our reportable segments, designed to eliminate underperforming assets and cost inefficiencies. This plan was expanded in 2020 as we identified additional opportunities to eliminate inefficiencies, including actions in response to impacts to the business from COVID-19. We have incurred and expect to incur costs for inventory write-downs; employee severance and other expenditures related to employee terminations; lease exit costs, such as lease termination fees, accelerated amortization of operating lease assets and impairment of operating lease assets; other costs related to facility exits, such as moving expenses to relocate inventory and equipment; and accelerated depreciation of fixed assets to be disposed of earlier than the end of the previously estimated useful lives. This plan is expected to be completed in 2023 with a total incurred cost of between $ 108 million to $ 115 million. Acquisition Integration Plans As we complete the acquisition of a business, we may incur costs related to integrating the acquired business into our current business structure and systems. These costs are typically incurred within a year from the acquisition date and vary in magnitude depending on the size and complexity of the related integration activities. We expect to incur an insignificant amount of future expenses to complete any open integration plans. 80 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the expenses incurred related to our restructuring plans (in millions): Year Ended December 31, Plan Expense Type 2022 2021 2020 2022 Global Plan Employee related costs $ 6 $ — $ — Facility exit costs 1 — — Other costs 3 — — Total $ 10 $ — $ — 2019/2020 Global Plan Employee related costs $ — $ 4 $ 19 Facility exit costs 1 7 23 Inventory related costs (1) — — 7 Other costs — — 7 Total $ 1 $ 11 $ 56 1 LKQ Europe Plan Employee related costs $ 1 $ 6 $ — Total $ 1 $ 6 $ — Acquisition Integration Plans Employee related costs $ 2 $ — $ 7 Facility exit costs 1 — — Other costs — — 2 Total $ 3 $ — $ 9 Total restructuring expenses $ 15 $ 17 $ 65 (1) Recorded to Cost of goods sold in the Consolidated Statement of Income The following table sets forth the cumulative plan costs by segment related to our restructuring plans (in millions): Cumulative Program Costs Wholesale - North America Europe Specialty Self Service Total 2022 Global Plan $ — $ 10 $ — $ — $ 10 2019/2020 Global Plan 43 59 2 2 106 1 LKQ Europe Plan $ — $ 7 $ — $ — $ 7 The following table sets forth the liability recorded related to our restructuring plans (in millions): 2022 Global Plan 2019/20 Global Plan 1 LKQ Europe Plan December 31, December 31, December 31, 2022 2021 2022 2021 2022 2021 Employee related costs (1) $ 3 $ — $ 1 $ 2 $ 1 $ 4 Facility exit costs (2) 1 — 6 9 — — Other costs — — 2 3 — — Total $ 4 $ — $ 9 $ 14 $ 1 $ 4 (1) Reported in Accrued payroll-related liabilities on our Consolidated Balance Sheets. (2) Reported in Current portion of operating lease liabilities and Long-term operating lease liabilities, excluding current portion on our Consolidated Balance Sheets. 81 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Transaction Related Expenses The following table sets forth the transaction related expenses incurred (in millions): Year Ended December 31, 2022 2021 2020 Professional fees (1) $ 5 $ 3 $ — Other expenses — — 8 (2) Transaction related expenses $ 5 $ 3 $ 8 (1) Included external costs such as legal, accounting and advisory fees related to completed and potential transactions. (2) Primarily resulted from the resolution of a purchase price matter related to the Stahlgruber transaction for an amount above our prior estimate. Note 15. 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 anti-dilution and other adjustment provisions. We have granted RSUs, stock options, and restricted stock under the Equity Incentive Plan. Of the shares approved by stockholders for issuance under the Equity Incentive Plan, 8.2 million shares remained available for issuance as of December 31, 2022. We expect to issue new or treasury shares of common stock to cover past and future equity grants. RSUs The RSUs we have issued vest over periods of up to five years , subject to a continued service condition. Currently outstanding RSUs (other than PSUs, which are described below) contain either a time-based vesting condition or a combination of a performance-based vesting condition and a time-based vesting condition, in which case both conditions must be met before any RSUs vest. For all of the RSUs containing a performance-based vesting condition, we must report positive diluted earnings per share, subject to certain adjustments, during any fiscal year period within five years following the grant date. Each RSU converts into one share of LKQ common stock on the applicable vesting date. The grant date fair value of RSUs is based on the market price of LKQ stock on the grant date. Starting with our 2019 grants, participants who are eligible for retirement (defined as a voluntary separation of service from the Company after the participant has attained at least 60 years of age and completed at least five years of service) will continue to vest in their awards following retirement; if retirement occurs during the first year of the vesting period (for RSUs subject to a time-based vesting condition) or the first year of the performance period (for RSUs with a performance-based vesting condition), the participant vests in a prorated amount of the RSU grant based on the portion of the year employed. For our RSU grants prior to 2019, participants forfeit their unvested shares upon retirement. Outstanding unvested RSUs earn dividend equivalents at the same rate as dividends on LKQ’s common stock. The dividend equivalents are subject to the same vesting requirements, restrictions and forfeiture provisions as the original award. The Compensation and Human Capital Committee of our Board of Directors approved the grant of 169,605 , 208,603 , and 230,360 RSUs to our executive officers that included both a performance-based vesting condition and a time-based vesting condition in 2022, 2021, and 2020, respectively. The performance-based vesting conditions for the 2022, 2021, and 2020 grants to our executive officers have been satisfied. The fair value of RSUs that vested during the years ended December 31, 2022, 2021, and 2020 was $ 38 million, $ 37 million, and $ 27 million, respectively; the fair value of RSUs vested is based on the market price of LKQ stock on the date vested. 82 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes activity related to our RSUs under the Equity Incentive Plan for the year ended December 31, 2022 (in millions, except years and per share amounts): Number Outstanding Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (1) Unvested as of January 1, 2022 1.4 $ 34.85 Granted (2) 0.7 $ 49.21 Vested ( 0.7 ) $ 37.36 Forfeited / Canceled ( 0.1 ) $ 43.01 Unvested as of December 31, 2022 1.3 $ 41.02 Expected to vest after December 31, 2022 1.1 $ 41.41 2.5 $ 57 (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, 2021 and 2020 was $ 39.22 and $ 31.68 , respectively. PSUs Starting in 2019, we granted PSUs with a three-year performance period to certain employees, including executive officers, under our Equity Incentive Plan. As these awards are performance-based, the exact number of shares to be paid out may be up to twice the grant amount, depending on our performance and the achievement of certain performance metrics (adjusted earnings per share, average organic parts and services revenue growth, and average return on invested capital) over the applicable three year performance periods. Outstanding unvested PSUs earn dividend equivalents at the same rate as dividends on LKQ's common stock. The dividend equivalents are subject to the same vesting requirements, restrictions and forfeiture provisions as the original award. The fair value of PSUs that vested during the year ended December 31, 2022 was $ 9 million; the fair value of PSUs vested is based on the market price of LKQ stock on the date vested. The following table summarizes activity related to our PSUs under the Equity Incentive Plan for the year ended December 31, 2022 (in millions, except years and per share amounts): Number Outstanding Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (1) Unvested as of January 1, 2022 0.5 $ 31.96 Granted (2) 0.1 $ 48.95 Performance-based adjustment (3) 0.1 $ 32.53 Vested ( 0.2 ) $ 27.74 Unvested as of December 31, 2022 0.5 $ 37.87 Expected to vest after December 31, 2022 0.4 $ 37.55 0.8 $ 24 (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, 2021 and December 31, 2020 was $ 38.31 and $ 31.85 , 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, 2022. 83 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-Based Compensation Expense Stock-based compensation expense and the resulting tax benefits included in the Consolidated Statements of Income were as follows (in millions): Year Ended December 31, 2022 2021 2020 Stock-based compensation expense $ 38 $ 34 $ 29 Income tax benefit ( 9 ) ( 8 ) ( 7 ) Stock-based compensation expense, net of tax $ 29 $ 26 $ 22 We did not capitalize any stock-based compensation costs during the years ended December 31, 2022, 2021, and 2020. As of December 31, 2022, unrecognized compensation expense related to unvested RSUs and PSUs is expected to be recognized as follows (in millions): Unrecognized Compensation Expense 2023 $ 20 2024 12 2025 6 2026 3 Total unrecognized compensation expense $ 41 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 16. 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 millions, except per share amounts): Year Ended December 31, 2022 2021 2020 Income from continuing operations $ 1,144 $ 1,091 $ 640 Denominator for basic earnings per share—Weighted-average shares outstanding 277.1 296.8 304.6 Effect of dilutive securities: RSUs 0.6 0.7 0.4 PSUs 0.3 0.2 — Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding 278.0 297.7 305.0 Basic earnings per share from continuing operations $ 4.13 $ 3.68 $ 2.10 Diluted earnings per share from continuing operations (1) $ 4.12 $ 3.67 $ 2.10 (1) Diluted earnings per share from continuing operations was computed using the treasury stock method for dilutive securities. The number of antidilutive securities was insignificant for the years ended December 31, 2022 and 2021 and was 0.7 million for the year ended December 31, 2020. 84 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17. Accumulated Other Comprehensive Income (Loss) The components of Accumulated Other Comprehensive Income (Loss) are as follows (in millions): 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 Loss Balance as of January 1, 2020 $ ( 171 ) $ 5 $ ( 32 ) $ ( 3 ) $ ( 201 ) Pretax income (loss) 113 ( 48 ) ( 9 ) — 56 Income tax effect — 12 3 — 15 Reclassification of unrealized loss — 40 7 — 47 Reclassification of deferred income taxes — ( 10 ) ( 2 ) — ( 12 ) Disposal of businesses 1 — — — 1 Other comprehensive loss from unconsolidated subsidiaries — — — ( 5 ) ( 5 ) Balance as of December 31, 2020 $ ( 57 ) $ ( 1 ) $ ( 33 ) $ ( 8 ) $ ( 99 ) Pretax (loss) income ( 64 ) 3 11 — ( 50 ) Income tax effect — ( 1 ) ( 3 ) — ( 4 ) Reclassification of unrealized (gain) loss — ( 2 ) 2 — — Reclassification of deferred income taxes — 1 ( 1 ) — — Balance as of December 31, 2021 $ ( 121 ) $ — $ ( 24 ) $ ( 8 ) $ ( 153 ) Pretax (loss) income ( 216 ) — 49 — ( 167 ) Income tax effect — — ( 14 ) — ( 14 ) Disposal of business 4 — — — 4 Other comprehensive income from unconsolidated subsidiaries — — — 7 7 Balance as of December 31, 2022 $ ( 333 ) $ — $ 11 $ ( 1 ) $ ( 323 ) The amounts of unrealized gains and losses on the Cash Flow Hedges reclassified to the Consolidated Statements of Income are as follows (in millions): Year Ended December 31, Classification 2022 2021 2020 Unrealized (losses) gains on interest rate swaps Interest expense $ — $ ( 1 ) $ ( 3 ) Unrealized gains on cross currency swaps Interest expense — 1 10 Unrealized gains (losses) on cross currency swaps (1) Interest income and other income, net — 2 ( 38 ) Unrealized gains (losses) on foreign currency forward contracts (1) Interest income and other income, net — — ( 9 ) Total $ — $ 2 $ ( 40 ) (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, 2022, 2021, and 2020. 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. 85 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 18. Long-Term Obligations Long-term obligations consist of the following (in millions): December 31, 2022 December 31, 2021 Maturity Date Interest Rate Amount Interest Rate Amount Senior Secured Credit Agreement: Revolving credit facilities January 2024 4.24 % (1) $ 1,786 1.10 % (1) $ 1,887 Senior Notes: Euro Notes (2024) April 2024 3.88 % 535 3.88 % 569 Euro Notes (2028) April 2028 4.13 % 268 4.13 % 284 Notes payable Various through October 2030 3.25 % (1) 16 2.80 % (1) 23 Finance lease obligations 3.69 % (1) 48 3.50 % (1) 52 Other debt 2.28 % (1) 9 1.10 % (1) 9 Total debt 2,662 2,824 Less: long-term debt issuance costs ( 6 ) ( 12 ) Total debt, net of debt issuance costs 2,656 2,812 Less: current maturities, net of debt issuance costs ( 34 ) ( 35 ) Long term debt, net of debt issuance costs $ 2,622 $ 2,777 (1) Interest rate derived via a weighted average The scheduled maturities of long-term obligations outstanding at December 31, 2022 are as follows (in millions): Amount 2023 (1) $ 34 2024 2,334 2025 10 2026 3 2027 3 Thereafter 278 Total debt (2) $ 2,662 (1) Long-term obligations maturing by December 31, 2023 include $ 15 million of short-term debt that may be extended beyond the current year ending December 31, 2023. (2) The total debt amounts presented above reflect the gross values to be repaid (excluding debt issuance costs of $ 6 million as of December 31, 2022). Senior Secured Credit Agreement On January 5, 2023, we entered into a new credit agreement and terminated the senior secured credit agreement. See Note 25, "Subsequent Events" for further information related to the senior secured credit agreement and new credit agreement. On November 23, 2021, LKQ Corporation and certain other subsidiaries of LKQ (collectively, the "Borrowers") entered into Amendment No. 6 to the Fourth Amended and Restated Credit Agreement dated January 29, 2016 (the "Prior Credit Agreement"), which modified certain interest rates to provide that (1) Loans denominated in euros shall bear interest at a rate per annum equal to the Euro Interbank Offered Rate as administered by the European Money Markets Institute (or a comparable or successor administrator approved by the Administrative Agent) plus the Applicable Rate, (2) Swingline Loans denominated in 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 86 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. We also had the option to prepay outstanding amounts under the Prior 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 Prior Credit Agreement contained customary representations and warranties and customary covenants that provided limitations and conditions on our ability to enter into certain transactions. The Prior Credit Agreement also contained financial and negative covenants, including limitations on our net leverage ratio and a minimum interest coverage ratio. On April 18, 2022, S&P Global Ratings assigned LKQ an issuer credit rating of 'BBB-' with a stable outlook. This rating upgrade triggered the banks in our credit facility to release all collateral required under the Prior Credit Agreement and suspend all collateral requirements. Borrowings under the Prior Credit Agreement bore interest at variable rates, which depended on the currency and duration of the borrowing elected, plus an applicable margin. The applicable margin was subject to change in increments of 0.25 % depending on the net leverage ratio. Interest payments were due on the last day of the selected interest period or quarterly in arrears depending on the type of borrowing. We also paid a commitment fee based on the average daily unused amount of the revolving credit facilities. The commitment fee was subject to change in increments of 0.05 % depending on our net leverage ratio. In addition, we paid 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 were due quarterly in arrears. The total capacity under the revolving credit facility's multicurrency component was $ 3,150 million . Amounts outstanding under the revolving credit facility were due and payable upon maturity of the Prior Credit Agreement on January 29, 2024. Of the total borrowings outstanding under the Credit Agreement, th ere were no current maturities as of December 31, 2022 or December 31, 2021. As of December 31, 2022, there were letters of credit outstanding in the aggregate amount of $ 69 million . The amounts available under the revolving credit facilities were reduced by the amounts outstanding under letters of credit, and thus availability under the revolving credit facilities at December 31, 2022 was $ 1,295 million . 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)"). 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. 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 87 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 % of the principal amount thereof plus accrued but unpaid interest, if any, and such certain additional amounts, if any, to the redemption date. On May 31, 2022, Moody's Investors Services upgraded the rating on LKQ Italia's senior unsecured notes to Baa3 with a stable outlook. This rating upgrade, combined with the upgrade to BBB- by S&P Global Ratings in April 2022, triggered a Covenant Suspension Event, and LKQ and its subsidiaries will no longer be required to comply with certain restrictive covenants. Euro Notes (2026/2028) On April 9, 2018, LKQ European Holdings B.V. ("LKQ Euro Holdings"), a wholly-owned subsidiary of LKQ Corporation, completed an offering of € 1,000 million aggregate principal amount of senior notes. The offering consisted of € 750 million senior notes due 2026 (the "Euro Notes (2026)") and € 250 million senior notes due 2028 (the "Euro Notes (2028)" and, together with the Euro Notes (2026), the "Euro Notes (2026/28)") in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering, together with borrowings under our senior secured credit facility, were used (i) to finance a portion of the consideration paid for the Stahlgruber acquisition, (ii) for general corporate purposes and (iii) to pay related fees and expenses, including the refinancing of net financial debt. The Euro Notes (2026/28) are governed by the Indenture dated as of April 9, 2018 (the “Euro Notes (2026/28) Indenture”) among LKQ Euro Holdings, LKQ Corporation and certain of our subsidiaries (the “Euro Notes (2026/28) Subsidiaries”), the trustee, paying agent, transfer agent, and registrar. On April 1, 2021, we redeemed the 3.625 % Euro Notes (2026) at a redemption price equal to 101.813 % of the principal amount of the Euro Notes (2026) plus accrued and unpaid interest thereon to, but not including, April 1, 2021. The total redemption payment was $ 915 million (€ 777 million), including an early redemption premium of $ 16 million (€ 14 million) and accrued and unpaid interest of $ 16 million (€ 14 million). In the second quarter of 2021, we recorded a loss on debt extinguishment of $ 24 million related to the redemption due to the early-redemption premium and the write-off of the unamortized debt issuance costs. 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. 88 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On May 31, 2022, Moody's Investors Services upgraded the rating on LKQ Euro Holdings' senior unsecured notes to Baa3 with a stable outlook. This rating upgrade, combined with the upgrade to BBB- by S&P Global Ratings in April 2022, triggered a Covenant Suspension Event, and LKQ and its subsidiaries will no longer be required to comply with certain restrictive covenants. 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. Note 19. Derivative Instruments and Hedging Activities Cash Flow Hedges Through June 30, 2021, we held interest rate swap agreements to hedge a portion of the variable interest rate risk on our variable rate borrowings under our Credit Agreement and 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 interest rate swap agreements and cross currency swaps were settled as of June 2021 and no cash flow hedges remained outstanding as of December 31, 2022 and 2021. 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. The activity related to our previously matured cash flow hedges is included in Note 17, "Accumulated Other Comprehensive Income (Loss)" and presented in either operating activities or financing activities in our Consolidated Statements of Cash Flows. Other Derivative Instruments Not Designated as Hedges 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 at December 31, 2022 and 2021, along with the effect on our results of operations during the years ended December 31, 2022, 2021, and 2020, were not material. Note 20. 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, 2022, there were no significant changes in valuation techniques or inputs related to the financial assets or liabilities that we have historically recorded at fair value. The tiers in the fair value hierarchy include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. 89 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, 2022 and 2021 (in millions): Balance as of December 31, 2022 Fair Value Measurements as of December 31, 2022 Level 1 Level 2 Level 3 Liabilities: Contingent consideration liabilities $ 7 $ — $ — $ 7 Deferred compensation liabilities 73 — 73 — Total Liabilities $ 80 $ — $ 73 $ 7 Balance as of December 31, 2021 Fair Value Measurements as of December 31, 2021 Level 1 Level 2 Level 3 Liabilities: Contingent consideration liabilities $ 18 $ — $ — $ 18 Deferred compensation liabilities 89 — 89 — Total Liabilities $ 107 $ — $ 89 $ 18 The current portion of contingent consideration liabilities is included in Other current liabilities on the Consolidated Balance Sheets; deferred compensation liabilities and the noncurrent portion of contingent consideration liabilities are included in Other noncurrent liabilities on the Consolidated Balance Sheets based on the expected timing of the related payments. Our Level 2 liabilities are valued using inputs from third parties and market observable data. We obtain valuation data for the deferred compensation liabilities from third party sources, which use quoted market prices, investment allocations and reportable trades. Our contingent consideration liabilities are related to our business acquisitions. Under the terms of the contingent consideration agreements, payments may be made at specified future dates depending on the performance of the acquired business subsequent to the acquisition. The liabilities for these payments are classified as Level 3 liabilities because the related fair value measurement, which is determined using an income approach, includes significant inputs not observable in the market. We also have equity investments recorded in Other noncurrent assets that are reported at fair value. We have used net asset value as a practical expedient to value these equity investments and thus they are excluded from the fair value hierarchy disclosure. Financial Assets and Liabilities Not Measured at Fair Value Our debt is reflected on the Consolidated Balance Sheets at cost. Based on market conditions as of both December 31, 2022 and 2021, the fair value of the Prior Credit Agreement borrowings reasonably approximated the carrying values of $ 1,786 million and $ 1,887 million, respectively. As of December 31, 2022 and 2021, the fair values of the Euro Notes (2024) were approximately $ 535 million and $ 605 million, respectively, compared to carrying values of $ 535 million and $ 569 million, respectively. As of December 31, 2022 and 2021, the fair values of the Euro Notes (2028) were $ 254 million and $ 301 million, respectively, compared to carrying values of $ 268 million and $ 284 million, respectively. The fair value measurements of the borrowings under the credit agreement 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, 2022 and 2021 to assume these obligations. The fair values of the Euro Notes (2024) and Euro Notes (2028) 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. 90 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 21. Leases We lease certain warehouses, distribution centers, retail stores, office space, land, vehicles and equipment. 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, 2022 and 2021 related to our lease agreements are as follows (in millions): December 31, Leases Classification 2022 2021 Assets Operating lease ROU assets, net Operating lease assets, net $ 1,227 $ 1,361 Finance lease assets, net Property, plant and equipment, net 52 53 Total leased assets $ 1,279 $ 1,414 Liabilities Current Operating Current portion of operating lease liabilities $ 188 $ 203 Finance Current portion of long-term obligations 17 15 Noncurrent Operating Long-term operating lease liabilities, excluding current portion 1,091 1,209 Finance Long-term obligations, excluding current portion 31 37 Total lease liabilities $ 1,327 $ 1,464 The components of lease expense are as follows (in millions): Year Ended December 31, Lease Cost 2022 2021 2020 Operating lease cost $ 282 $ 314 $ 308 Short-term lease cost 16 9 7 Variable lease cost 96 97 98 Finance lease cost Amortization of leased assets 12 10 10 Interest on lease liabilities 2 2 2 Sublease income ( 5 ) ( 3 ) ( 2 ) Net lease cost $ 403 $ 429 $ 423 91 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The future minimum lease commitments under our leases at December 31, 2022 are as follows (in millions): Years Ending December 31, Operating leases Finance leases (1) Total 2023 $ 269 $ 18 $ 287 2024 233 10 243 2025 203 8 211 2026 173 4 177 2027 143 3 146 Thereafter 652 16 668 Future minimum lease payments 1,673 59 1,732 Less: Interest 394 11 405 Present value of lease liabilities $ 1,279 $ 48 $ 1,327 (1) Amounts are included in the scheduled maturities of long-term obligations in Note 18, "Long-Term Obligations". As of December 31, 2022, minimum operating lease payments for leases that have not yet commence d totaled $ 73 million . These operating leases will commence in the n ext 18 months with lease te rms of 3 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 2022 2021 Weighted-average remaining lease term (years) Operating leases 9.1 9.4 Finance leases 8.5 8.9 Weighted-average discount rate Operating leases 5.75 % 5.20 % Finance leases 3.69 % 3.50 % Year Ended December 31, Supplemental cash flows information (in millions) 2022 2021 2020 Cash paid for amounts included in the measurement of lease liabilities Operating cash outflows from operating leases $ 284 $ 286 $ 299 Financing cash outflows from finance leases 14 13 12 Leased assets obtained in exchange for finance lease liabilities 15 10 25 Leased assets obtained in exchange for operating lease liabilities 159 248 244 Note 22. Employee Benefit Plans Defined Benefit Plans We have funded and unfunded defined benefit plans covering certain employee groups in 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. 92 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Funded Status The table below summarizes the funded status of the defined benefit plans (in millions): December 31, 2022 2021 Change in projected benefit obligation: Projected benefit obligation - beginning of year $ 194 $ 212 Acquisitions and divestitures ( 2 ) 1 Service cost 5 5 Interest cost 2 1 Participant contributions 1 — Actuarial (gain) / loss ( 49 ) ( 11 ) Benefits paid (1) ( 5 ) ( 5 ) Settlement ( 1 ) ( 2 ) Transfers — 6 Currency impact ( 12 ) ( 13 ) Projected benefit obligation - end of year $ 133 $ 194 Change in fair value of plan assets: Fair value - beginning of year $ 63 $ 59 Actual return on plan assets — 2 Employer contributions 5 5 Participant contributions 1 — Benefits paid ( 4 ) ( 5 ) Settlement ( 1 ) ( 2 ) Transfers — 6 Currency impact ( 3 ) ( 2 ) Fair value - end of year $ 61 $ 63 Funded status at end of year (liability) $ ( 72 ) $ ( 131 ) Accumulated benefit obligation $ 131 $ 191 (1) Includes amounts paid from plan assets as well as amounts paid from Company assets. The net amounts recognized for defined benefit plans in the Consolidated Balance Sheets were as follows (in millions): December 31, 2022 2021 Noncurrent assets $ 3 $ — Current liabilities ( 5 ) ( 5 ) Noncurrent liabilities ( 70 ) ( 126 ) $ ( 72 ) $ ( 131 ) 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 millions): December 31, 2022 2021 Accumulated benefit obligation $ 94 $ 191 Aggregate fair value of plan assets 21 63 93 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 millions): December 31, 2022 2021 Projected benefit obligation $ 96 $ 194 Aggregate fair value of plan assets 21 63 The table below summarizes the weighted-average assumptions used to calculate the year-end benefit obligations: December 31, 2022 2021 Discount rate used to determine benefit obligation 3.4 % 1.0 % Rate of future compensation increase 1.9 % 1.7 % Net Periodic Benefit Cost The table below summarizes the components of net periodic benefit cost for the defined benefit plans (in millions): Year Ended December 31, 2022 2021 2020 Service cost $ 5 $ 5 $ 4 Interest cost 2 1 3 Expected return on plan assets (1) ( 2 ) ( 2 ) ( 3 ) Amortization of actuarial loss (2) — 2 1 Settlement loss (3) — — 6 Net periodic benefit cost $ 5 $ 6 $ 11 (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 for our pension plans. 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. (3) In June 2019, we approved an amendment to terminate our U.S. Plan. As a result of the final settlement of this plan, 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. 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: December 31, 2022 2021 2020 Discount rate used to determine service cost 1.0 % 0.4 % 0.7 % Discount rate used to determine interest cost 1.2 % 0.8 % 1.8 % Rate of future compensation increase 1.7 % 2.0 % 2.1 % Expected long-term return on plan assets (1) 2.8 % 3.2 % 2.9 % (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. 94 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2022, the pretax amounts recognized in Accumulated other comprehensive loss consisted of $ 16 million of net actuarial gains 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, 2023. 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, 2022 and 2021 are the same. Level 3 investments: Investments in insurance contracts represent the cash surrender value of the insurance policy. These amounts are determined by an actuary 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 millions): December 31, 2022 2021 Level 1 Level 2 Level 3 NAV Total Level 1 Level 2 Level 3 NAV Total Insurance contracts $ — $ — $ 40 $ — $ 40 $ — $ — $ 42 $ — $ 42 Mutual fund (1) — — — 21 21 — — — 21 21 Total investments at fair value $ — $ — $ 40 $ 21 $ 61 $ — $ — $ 42 $ 21 $ 63 (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 millions): December 31, 2022 2021 Balance at beginning of year $ 42 $ 45 Actual return on plan assets: Relating to assets held at the reporting date 1 1 Purchases, sales and settlements ( 1 ) ( 1 ) Currency impact ( 2 ) ( 3 ) Balance at end of year $ 40 $ 42 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. 95 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Employer Contributions and Estimated Future Benefit Payments During the year ended December 31, 2022, we contributed $ 5 million to our pension plans. We estimate that contributions to our pension plans during 2023 will be $ 6 million. The following table summarizes estimated future benefit payments as of December 31, 2022 (in millions): Years Ending December 31, Amount 2023 $ 5 2024 5 2025 5 2026 6 2027 7 2028 - 2032 35 Note 23. Income Taxes The provision for income taxes consists of the following components (in millions): Year Ended December 31, 2022 2021 2020 Current: Federal $ 212 $ 195 $ 156 State 60 47 38 Foreign 107 116 90 Total current provision for income taxes $ 379 $ 358 $ 284 Deferred: Federal $ — $ ( 3 ) $ ( 7 ) State ( 2 ) — ( 6 ) Foreign 8 ( 24 ) ( 21 ) Total deferred (benefit) provision for income taxes $ 6 $ ( 27 ) $ ( 34 ) Provision for income taxes $ 385 $ 331 $ 250 Income taxes have been based on the following components of income from continuing operations before provision for income taxes (in millions): Year Ended December 31, 2022 2021 2020 Domestic $ 1,078 $ 978 $ 713 Foreign 440 421 172 Income from continuing operations before provision for income taxes $ 1,518 $ 1,399 $ 885 96 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The U.S. federal statutory rate is reconciled to the effective tax rate as follows: Year Ended December 31, 2022 2021 2020 U.S. federal statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of state credits and federal tax impact 3.0 % 2.7 % 3.2 % Impact of rates on international operations 1.1 % 1.2 % 1.9 % Change in valuation allowances 0.4 % ( 0.8 ) % 1.7 % Non-deductible expenses 1.0 % 0.4 % 0.8 % Excess tax benefits from stock-based compensation ( 0.2 ) % ( 0.1 ) % — % Other, net ( 1.0 ) % ( 0.8 ) % ( 0.4 ) % Effective tax rate 25.3 % 23.6 % 28.2 % Beginning in 2018, the Tax Cuts and Jobs Act ("Tax Act") imposed a new regime of taxation on foreign subsidiary earnings referred to as 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 eight installments from 2018 through 2025. The next required installment of $ 6 million is recorded in Other current liabilities and the remaining $ 19 million is recorded in Other noncurrent liabilities on the Consolidated Balance Sheets. Undistributed earnings of our foreign subsidiaries amounted to approximately $ 1,487 million at December 31, 2022. 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 regimes, 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, 2022, 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 U.S. tax regime, it remains impractical to estimate the amount of deferred taxes potentially payable were such earnings to be repatriated. On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law in the United States. The IRA, among other provisions, enacted a 15 % corporate minimum tax effective for taxable years beginning after December 31, 2022 and a 1 % excise tax on the repurchase of corporate stock after December 31, 2022. We do not currently expect the corporate minimum tax provisions of the IRA to have a material impact on our financial results. The impact of the excise tax provisions will be dependent upon the volume of any future stock repurchases. 97 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The significant components of the deferred tax assets and liabilities are as follows (in millions): December 31, 2022 2021 Deferred Tax Assets: Accrued expenses and reserves $ 71 $ 76 Qualified and nonqualified retirement plans 11 31 Inventory 15 11 Accounts receivable 19 18 Interest deduction carryforwards 28 32 Stock-based compensation 9 7 Operating lease liabilities 307 338 Net operating loss carryforwards 19 25 Other 17 25 Total deferred tax assets, gross 496 563 Less: valuation allowance ( 44 ) ( 45 ) Total deferred tax assets $ 452 $ 518 Deferred Tax Liabilities: Goodwill and other intangible assets $ 236 $ 238 Property, plant and equipment 86 93 Trade name 82 91 Operating lease assets, net 291 323 Other 12 20 Total deferred tax liabilities $ 707 $ 765 Net deferred tax liability $ ( 255 ) $ ( 247 ) Deferred tax assets and liabilities are reflected on the Consolidated Balance Sheets as follows (in millions): December 31, 2022 2021 Noncurrent deferred tax assets $ 25 $ 32 Noncurrent deferred tax liabilities 280 279 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 $ 19 million and $ 25 million at December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, 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, 2022 and 2021, we had interest deduction carryforwards in Italy and Germany, the tax benefits of which totaled $ 28 million and $ 32 million, respectively. As of December 31, 2022 and 2021, we had capital loss carryforwards, the tax benefit of which totaled an insignificant amount and $ 4 million, respectively. As of December 31, 2022 and 2021, valuation allowances of $ 44 million and $ 45 million, respectively, were recorded for deferred tax assets related to the foreign interest deduction carryforwards, certain foreign and U.S. net operating loss carryforwards and capital loss carryforwards. The $ 1 million net decrease in valuation allowances was primarily attributable to utilization of net operating loss carryforwards and U.S. capital loss carryforward valuation allowance activity. The net operating losses generally carry forward for a period of five years to indefinitely. The interest deduction carryforwards in Italy and Germany do not expire. 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 98 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 millions): 2022 2021 2020 Balance at January 1 $ 5 $ 2 $ 2 Additions based on tax positions related to the current year — — 1 Additions based on tax positions related to prior years 2 5 — Reductions for tax positions of prior year — ( 2 ) — Settlements with taxing authorities ( 2 ) — ( 1 ) Balance at December 31 $ 5 $ 5 $ 2 Included in the balance of unrecognized tax benefits above as of December 31, 2022, 2021 and 2020, are approximately $ 5 million, $ 4 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, 2022, 2021 and 2020, includes an insignificant amount 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, $ 1 million, and less than $ 1 million at December 31, 2022, 2021 and 2020, respectively. During the years ended December 31, 2022, 2021 and 2020, we recorded $ 1 million or less of interest and penalties through the income tax provision, prior to any reversals for lapses in the statutes of limitations. During the twelve months beginning January 1, 2023, it is reasonably possible that we will reduce unrecognized tax benefits by $ 1 million, most of which would impact our effective tax rate. 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 24. Segment and Geographic Information We have four operating segments: Wholesale - North America, Europe, Specialty and Self Service, each of which is presented as a reportable segment. Beginning in 2022, the Wholesale - North America and Self Service operating segment results were separated from the previous reportable segment, North America, and each of Wholesale - North America and Self Service is now a separate reportable segment. Segment results have been adjusted retrospectively to reflect this change. The segments are organized based on a combination of geographic areas served and type of product lines offered. The segments are managed separately as the businesses serve different customers and are affected by different economic conditions. Wholesale - North America and Self Service have similar economic characteristics and have common products and services, customers and methods of distribution. We are reporting these operating segments separately to provide greater transparency to investors. 99 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables present our financial performance by reportable segment for the periods indicated (in millions): Wholesale - North America Europe Specialty Self Service Eliminations Consolidated Year Ended December 31, 2022 Revenue: Third Party $ 4,556 $ 5,735 $ 1,788 $ 715 $ — $ 12,794 Intersegment — — 3 — ( 3 ) — Total segment revenue $ 4,556 $ 5,735 $ 1,791 $ 715 $ ( 3 ) $ 12,794 Segment EBITDA $ 852 $ 585 $ 199 $ 83 $ — $ 1,719 Total depreciation and amortization (1) 75 145 30 14 — 264 Year Ended December 31, 2021 Revenue: Third Party $ 4,376 $ 6,062 $ 1,864 $ 787 $ — $ 13,089 Intersegment 3 — 3 — ( 6 ) — Total segment revenue $ 4,379 $ 6,062 $ 1,867 $ 787 $ ( 6 ) $ 13,089 Segment EBITDA $ 769 $ 618 $ 223 $ 175 $ — $ 1,785 Total depreciation and amortization (1) 80 157 30 17 — 284 Year Ended December 31, 2020 Revenue: Third Party $ 4,039 $ 5,492 $ 1,505 $ 593 $ — $ 11,629 Intersegment 1 — 4 — ( 5 ) — Total segment revenue $ 4,040 $ 5,492 $ 1,509 $ 593 $ ( 5 ) $ 11,629 Segment EBITDA $ 665 $ 428 $ 163 $ 113 $ — $ 1,369 Total depreciation and amortization (1) 83 173 29 14 — 299 (1) Amounts presented include depreciation and amortization expense recorded within Cost of goods sold, Selling, general & administrative expenses and Restructuring and transaction related expenses. The key measure of segment profit or loss reviewed by our chief operating decision maker, our Chief Executive Officer, is Segment EBITDA. We use Segment EBITDA to compare profitability among the segments and evaluate business strategies. Segment EBITDA includes revenue and expenses that are controllable by the segment. Corporate general and administrative expenses are allocated to the segments based on usage, with shared expenses apportioned based on the segment's percentage of consolidated revenue. We calculate Segment EBITDA as EBITDA excluding restructuring and transaction related expenses (which includes restructuring expenses recorded in Cost of goods sold); change in fair value of contingent consideration liabilities; other gains and losses related to acquisitions, equity method investments, or divestitures; equity in losses and earnings of unconsolidated subsidiaries; equity investment fair value adjustments; impairment charges; and direct impacts of the Ukraine/Russia conflict and related sanctions (including provisions for and subsequent adjustments to reserves for asset recoverability and expenditures to support our employees and their families). EBITDA, which is the basis for Segment EBITDA, is calculated as net income excluding discontinued operations, depreciation, amortization, interest (which includes gains and losses on debt extinguishment) and income tax expense. 100 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The table below provides a reconciliation of Net Income to EBITDA and Segment EBITDA (in millions): Year Ended December 31, 2022 2021 2020 Net income $ 1,150 $ 1,092 $ 640 Less: net income attributable to continuing noncontrolling interest 1 1 2 Net income attributable to LKQ stockholders 1,149 1,091 638 Subtract: Net income from discontinued operations 6 1 — Net income from continuing operations attributable to LKQ stockholders 1,143 1,090 638 Add: Depreciation and amortization - SG&A 237 260 272 Depreciation and amortization - cost of goods sold 27 23 22 Depreciation and amortization - restructuring expenses (1) — 1 5 Interest expense, net of interest income 70 70 102 Loss on debt extinguishment — 24 13 Provision for income taxes 385 331 250 EBITDA 1,862 1,799 1,302 Subtract: Equity in earnings of unconsolidated subsidiaries (2) 11 23 5 Equity investment fair value adjustments ( 5 ) 11 — Add: Restructuring and transaction related expenses (1) 20 19 61 Restructuring expenses - cost of goods sold — — 7 (Gain) on disposal of businesses and impairment of net assets held for sale (3) ( 159 ) — 3 Change in fair value of contingent consideration liabilities — 1 1 Gains on previously held equity interests ( 1 ) — — Direct impacts of Ukraine/Russia conflict (4) 3 — — Segment EBITDA $ 1,719 $ 1,785 $ 1,369 (1) The sum of these two captions represents the total amount that is reported in Restructuring and transaction related expenses in our Consolidated Statements of Income. Refer to Note 14, "Restructuring and Transaction Related Expenses," for further information. (2) Refer to Note 10, "Equity Method Investments," for further information. (3) Refer to "Other Divestitures (Not Classified in Discontinued Operations)" in Note 2, "Discontinued Operations and Divestitures," for further information. (4) Adjustments include provisions for and subsequent adjustments to reserves for asset recoverability (receivables and inventory) and expenditures to support our employees and their families in Ukraine. The following table presents capital expenditures by reportable segment (in millions): Year Ended December 31, 2022 2021 2020 Capital Expenditures Wholesale - North America $ 84 $ 113 $ 58 Europe 105 141 85 Specialty 19 23 11 Self Service 14 16 19 Total capital expenditures $ 222 $ 293 $ 173 101 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents assets by reportable segment (in millions): December 31, 2022 December 31, 2021 Receivables, net Wholesale - North America $ 351 $ 367 Europe 547 586 Specialty 92 102 Self Service 8 18 Total receivables, net 998 1,073 Inventories Wholesale - North America 822 776 Europe 1,418 1,327 Specialty 469 458 Self Service 43 50 Total inventories 2,752 2,611 Property, plant and equipment, net Wholesale - North America 505 526 Europe 547 577 Specialty 94 93 Self Service 90 103 Total property, plant and equipment, net 1,236 1,299 Operating lease assets, net Wholesale - North America 541 611 Europe 466 515 Specialty 85 83 Self Service 135 152 Total operating lease assets, net 1,227 1,361 Other unallocated assets 5,825 6,262 Total assets $ 12,038 $ 12,606 We report net receivables; inventories; net property, plant and equipment; and net operating lease assets by segment as that information is used by the chief operating decision maker in assessing segment performance. These assets provide a measure for the operating capital employed in each segment. Unallocated assets include cash and cash equivalents, prepaid expenses and other current and noncurrent assets, goodwill, other intangibles and equity method investments. Our largest countries of operation are the U.S., followed by the U.K. and Germany. Additional European operations are located in the Netherlands, Italy, Czech Republic, Belgium, Austria, Slovakia, Poland, and other European countries. Our operations in other countries include wholesale operations in Canada, remanufacturing operations in Mexico, an aftermarket parts freight consolidation warehouse in Taiwan, and administrative support functions in India. Our net sales are attributed to geographic area based on the location of the selling operation. 102 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth our revenue by geographic area (in millions): Year Ended December 31, 2022 2021 2020 Revenue United States $ 6,632 $ 6,626 $ 5,755 United Kingdom 1,550 1,648 1,461 Germany 1,523 1,622 1,523 Other countries 3,089 3,193 2,890 Total revenue $ 12,794 $ 13,089 $ 11,629 The following table sets forth our tangible long-lived assets by geographic area (in millions): December 31, 2022 December 31, 2021 Long-lived assets United States $ 1,371 $ 1,487 Germany 290 329 United Kingdom 256 305 Other countries 546 539 Total long-lived assets $ 2,463 $ 2,660 Note 25. Subsequent Events New Credit Agreement On January 5, 2023, we and certain other subsidiaries of ours (collectively, the "Borrowers") entered into a new Credit Agreement (the “New Credit Agreement”) with several lenders; Wells Fargo Bank, National Association (“Wells Fargo Bank”), as administrative agent; Bank of America, N.A. (“Bank of America”), as syndication agent; PNC Bank, National Association, Truist Bank and MUFG Bank, Ltd. (“MUFG”), as Documentation Agents; Wells Fargo Bank and Bank of America, as Sustainability Structuring Agents; Wells Fargo Securities, LLC, BofA Securities, Inc., PNC Capital Markets LLC, Truist Securities, Inc. and MUFG, as joint bookrunners and joint lead arrangers. The New Credit Agreement replaced our Prior Credit Agreement (as described in Note 18, "Long-Term Obligations"). The New Credit Agreement establishes; (i) an unsecured revolving credit facility of up to a U.S. Dollar equivalent of $ 2.0 billion, which includes a $ 150 million sublimit for the issuance of letters of credit and a $ 150 million sublimit for swing line loans (the “Revolving Loans”) and; (ii) an unsecured term loan facility of up to $ 500 million (the “Term Loan” and collectively with the Revolving Loans, the “Loans”). The Revolving Loans have a maturity date of January 5, 2028 and the Term Loan has a maturity date of January 5, 2026, each of which may be extended by one additional year. The Term Loan has no required amortization payments prior to its maturity date. Proceeds from the Loans may be used (i) to refinance certain existing indebtedness of LKQ and its subsidiaries and (ii) for general corporate purposes of LKQ and its subsidiaries in the ordinary course of business, including acquisitions and capital expenditures. Under the New Credit Agreement, our borrowings will bear interest at the Secured Overnight Financing Rate (i.e. "SOFR") plus the applicable spread or other risk-free interest rates that are applicable for the specified currency plus a spread. The New Credit Agreement contains customary covenants for an unsecured credit facility for a company that has debt ratings that are investment grade, such as, requirements to comply with a total leverage ratio and interest coverage ratio, each calculated in accordance with the terms of the New Credit Agreement, and limits on the Company’s and its subsidiaries’ ability to incur liens and indebtedness. Under the terms of the New Credit Agreement, the Borrowers withdrew initial borrowings totaling a U.S. Dollar equivalent $ 1.8 billion at closing. Amounts borrowed under the New Credit Agreement were used by the Borrowers to repay the outstanding principal amount and related fees and expenses under the Prior Credit Agreement and for other corporate purposes. 103 LKQ CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Termination of Prior Credit Agreement In connection with entering into the New Credit Agreement noted above, Wells Fargo and the various lending parties terminated the existing Senior Secured Credit Agreement and each amendment thereto resulting in an immaterial loss on extinguishment of debt. Interest Rate Swaps In February 2023, we entered into two sets of interest rate swap agreements to hedge the risk from our variable interest rate borrowings on our New Credit Agreement. The first set of agreements mature in February 2025 and include a notional amount of $ 400 million at a fixed average rate of 4.63 %. The second set of agreements mature in February 2026 and include a notional amount of $ 300 million at a fixed average rate of 4.23 %. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.