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Lkq Corp (LKQ) SEC Filing 10-Q Quarterly report for the period ending Tuesday, March 31, 2020

Lkq Corp

CIK: 1065696 Ticker: LKQ
Exhibit 99.1

lkqpressreleaseimage.jpg


LKQ CORPORATION ANNOUNCES RESULTS FOR FIRST QUARTER 2020


First quarter 2020 revenue of $3.0 billion (down 3.2% year-over-year)
Parts and services organic revenue declined 3.5% (4.7% on a per day basis)
Net income1 attributable to LKQ stockholders of $146 million (up 49%); adjusted net income of $176 million (flat compared to the prior year)
Diluted EPS attributable to LKQ stockholders of $0.48; adjusted diluted EPS of $0.57
Operating cash flow of $195 million (up 10%); free cash flow of $150 million (up 21%)
Reduced borrowings by $230 million
Implemented targeted cost actions contributing to potential annualized savings run rate of over $1.0 billion
Approximately $1.9 billion of liquidity as of March 31, 2020

Chicago, IL (April 30, 2020) -- LKQ Corporation (Nasdaq: LKQ) today announced results for the first quarter ended March 31, 2020.  The Company also provided an update on the impact of the coronavirus (“COVID-19”) pandemic on its business and its response designed to mitigate the impact.
COVID-19 Update
“As the COVID-19 pandemic spread rapidly across the globe during the first quarter, our number one priority was, and continues to be, the health and safety of our employees, customers, vendor partners and the communities where we operate. Our businesses got off to an excellent start in January and February, carrying the strong momentum from 2019 on all fronts and reinforcing our key priorities of profitable revenue growth, accretive margins and cash flow generation. Through February, each of our segments was in line with or ahead of our revenue and profit expectations. As the restrictions on movement of people were imposed resulting in the decline of demand for our parts across all business segments, our financial results during the second half of March deteriorated. This reduced level of demand has continued, with April revenue down approximately 40% compared to the prior year, significantly impacting our near-term financial results. We anticipate a gradual improvement in revenue and profitability as governments around the globe begin the process of lifting the restrictions on mobility and opening their economies,” stated Dominick Zarcone, President and Chief Executive Officer of LKQ Corporation.
Mr. Zarcone further commented, “To help mitigate the business disruption caused by the COVID-19 pandemic, and to position LKQ for earnings growth when the U.S. and European economies rebound, we have taken decisive action and implemented comprehensive cost reduction plans throughout the enterprise, including substantial staffing adjustments. This focus on our cost structure and the variable nature of certain expenses has resulted in a potential annualized run-rate savings of more than $1 billion.  As market conditions improve, we look forward to bringing our people back, so we can both fulfill the anticipated increase in demand and continue to provide industry leading levels of customer service.”



1 References to Net income and Diluted earnings per share, and the corresponding adjusted figures, in this release reflect amounts from continuing operations attributable to LKQ stockholders.


The following information was filed by Lkq Corp (LKQ) on Thursday, April 30, 2020 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________ 
FORM 10-Q
____________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from              to
Commission File Number: 000-50404
____________________________ 
LKQ CORPORATION
(Exact name of registrant as specified in its charter)
____________________________ 
Delaware
 
36-4215970
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
500 West Madison Street,
Suite 2800

 

Chicago
Illinois

 
60661
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (312621-1950
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of each exchange on which registered
 
Common Stock, par value $.01 per share
 
LKQ
 
NASDAQ
 Global Select Market

________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes    No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer

Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No 
At May 1, 2020, the registrant had outstanding an aggregate of 303,968,001 shares of Common Stock.


 


PART I
FINANCIAL INFORMATION

Item 1. Financial Statements
LKQ CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Income
(In thousands, except per share data)
 
Three Months Ended
 
March 31,
 
2020
 
2019
Revenue
$
3,000,935

 
$
3,100,303

Cost of goods sold
1,787,059

 
1,892,039

Gross margin
1,213,876

 
1,208,264

Selling, general and administrative expenses
899,811

 
896,532

Restructuring and acquisition related expenses
6,970

 
3,307

(Gain on disposal of business) and impairment of net assets held for sale
(249
)
 
15,023

Depreciation and amortization
65,495

 
71,002

Operating income
241,849

 
222,400

Other expense (income):
 
 
 
Interest expense, net of interest income
25,931

 
36,089

Loss on debt extinguishment
12,751

 

Other income, net
(3,622
)
 
(3,851
)
Total other expense, net
35,060

 
32,238

Income from continuing operations before provision for income taxes
206,789

 
190,162

Provision for income taxes
60,411

 
51,550

Equity in earnings (losses) of unconsolidated subsidiaries
516

 
(39,549
)
Income from continuing operations
146,894


99,063

Net loss from discontinued operations
(915
)
 

Net income
145,979

 
99,063

Less: net income attributable to continuing noncontrolling interest
740

 
1,015

Less: net income attributable to discontinued noncontrolling interest
103

 

Net income attributable to LKQ stockholders
$
145,136

 
$
98,048

 
 
 
 
Basic earnings per share: (1)
 
 
 
Income from continuing operations
$
0.48

 
$
0.31

Net loss from discontinued operations
(0.00
)
 

Net income
0.48

 
0.31

Less: net income attributable to continuing noncontrolling interest
0.00

 
0.00

Less: net income attributable to discontinued noncontrolling interest
0.00

 

Net income attributable to LKQ stockholders
$
0.47

 
$
0.31

 
 
 
 
Diluted earnings per share: (1)
 
 
 
Income from continuing operations
$
0.48

 
$
0.31

Net loss from discontinued operations
(0.00
)
 

Net income
0.48

 
0.31

Less: net income attributable to continuing noncontrolling interest
0.00

 
0.00

Less: net income attributable to discontinued noncontrolling interest
0.00

 

Net income attributable to LKQ stockholders
$
0.47

 
$
0.31


(1) The sum of the individual earnings per share amounts may not equal the total due to rounding.

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
2




LKQ CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income
(In thousands)
 
Three Months Ended
 
March 31,
 
2020
 
2019
Net income
$
145,979

 
$
99,063

Less: net income attributable to continuing noncontrolling interest
740

 
1,015

Less: net income attributable to discontinued noncontrolling interest
103

 

Net income attributable to LKQ stockholders
145,136

 
98,048

 
 
 
 
Other comprehensive (loss) income:
 
 
 
Foreign currency translation, net of tax
(103,965
)
 
(9,895
)
Net change in unrealized gains/losses on cash flow hedges, net of tax
(7,321
)
 
(2,737
)
Net change in unrealized gains/losses on pension plans, net of tax
120

 
191

Net change in other comprehensive loss from unconsolidated subsidiaries
(1,852
)
 
(3,463
)
Other comprehensive loss
(113,018
)
 
(15,904
)
 
 
 
 
Comprehensive income
32,961

 
83,159

Less: comprehensive income attributable to continuing noncontrolling interest
740

 
1,015

Less: comprehensive income attributable to discontinued noncontrolling interest
103

 

Comprehensive income attributable to LKQ stockholders
$
32,118

 
$
82,144


The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
 
March 31,
 
December 31,
 
2020
 
2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
332,784

 
$
523,020

Receivables, net
1,168,626

 
1,131,132

Inventories
2,718,630

 
2,772,777

Prepaid expenses and other current assets
222,624

 
260,890

Total current assets
4,442,664

 
4,687,819

Property, plant and equipment, net
1,202,329

 
1,234,400

Operating lease assets, net
1,269,280

 
1,308,511

Intangible assets:
 
 
 
Goodwill
4,334,725

 
4,406,535

Other intangibles, net
819,335

 
850,338

Equity method investments
145,859

 
139,243

Other noncurrent assets
139,878

 
153,110

Total assets
$
12,354,070

 
$
12,779,956

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
893,807

 
$
942,795

Accrued expenses:
 
 
 
Accrued payroll-related liabilities
162,944

 
179,203

Refund liability
99,680

 
97,314

Other accrued expenses
341,671

 
289,683

Other current liabilities
130,903

 
121,623

Current portion of operating lease liabilities
218,998

 
221,527

Current portion of long-term obligations
90,965

 
326,367

Total current liabilities
1,938,968

 
2,178,512

Long-term operating lease liabilities, excluding current portion
1,104,936

 
1,137,597

Long-term obligations, excluding current portion
3,672,221

 
3,715,389

Deferred income taxes
300,117

 
310,129

Other noncurrent liabilities
326,432

 
365,672

Commitments and contingencies
 
 
 
Redeemable noncontrolling interest
24,077

 
24,077

Stockholders' equity:
 
 
 
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 320,439,059 shares issued and 303,943,144 shares outstanding at March 31, 2020; 319,927,243 shares issued and 306,731,328 shares outstanding at December 31, 2019
3,204

 
3,199

Additional paid-in capital
1,425,600

 
1,418,239

Retained earnings
4,282,753

 
4,140,136

Accumulated other comprehensive loss
(313,903
)
 
(200,885
)
Treasury stock, at cost; 16,495,915 shares at March 31, 2020 and 13,195,915 shares at December 31, 2019
(439,819
)
 
(351,813
)
Total Company stockholders' equity
4,957,835

 
5,008,876

Noncontrolling interest
29,484

 
39,704

Total stockholders' equity
4,987,319

 
5,048,580

Total liabilities and stockholders' equity
$
12,354,070

 
$
12,779,956


The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
 
Three Months Ended
 
March 31,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
145,979

 
$
99,063

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
71,379

 
76,207

Impairment of equity method investments

 
39,551

(Gain on disposal of business) and impairment of net assets held for sale
(249
)
 
15,023

Stock-based compensation expense
7,968

 
5,673

Loss on debt extinguishment
12,751

 

Other
(2,721
)
 
(310
)
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:
 
 
 
Receivables, net
(63,938
)
 
(205,029
)
Inventories
(7,522
)
 
71,811

Prepaid income taxes/income taxes payable
41,585

 
42,917

Accounts payable
(27,170
)
 
23,291

Other operating assets and liabilities
16,501

 
9,028

Net cash provided by operating activities
194,563

 
177,225

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment
(44,538
)
 
(53,016
)
Proceeds from disposals of property, plant and equipment
5,528

 
1,252

Acquisitions, net of cash acquired
(7,220
)
 
(4,785
)
Proceeds from disposal of businesses, net of cash sold
1,763

 

Other investing activities, net
(405
)
 
(1,235
)
Net cash used in investing activities
(44,872
)
 
(57,784
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Early-redemption premium
(9,498
)
 

Repayment of U.S. Notes (2023)
(600,000
)
 

Borrowings under revolving credit facilities
460,186

 
284,641

Repayments under revolving credit facilities
(134,674
)
 
(312,339
)
Repayments under term loans
(4,375
)
 
(2,188
)
Borrowings under receivables securitization facility
111,300

 
6,600

Repayments under receivables securitization facility
(12,900
)
 
(36,910
)
Repayments of other debt, net
(49,481
)
 
(625
)
Purchase of treasury stock
(88,006
)
 
(70,462
)
Other financing activities, net
(7,291
)
 
(1,448
)
Net cash used in financing activities
(334,739
)
 
(132,731
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(11,746
)
 
(2,513
)
Net decrease in cash, cash equivalents and restricted cash
(196,794
)
 
(15,803
)
Cash, cash equivalents and restricted cash of continuing operations, beginning of period
528,387

 
337,250

Add: Cash, cash equivalents and restricted cash of discontinued operations, beginning of period
6,470

 

Cash, cash equivalents and restricted cash of continuing and discontinued operations, beginning of period
534,857

 
337,250

Cash, cash equivalents and restricted cash, end of period
$
338,063

 
$
321,447

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Reconciliation of cash, cash equivalents and restricted cash
 
 
 
Cash and cash equivalents
$
332,784

 
$
316,066

Restricted cash included in Other noncurrent assets
5,279

 
5,381

Cash, cash equivalents and restricted cash, end of period
$
338,063


$
321,447

 
 
 
 
Supplemental disclosure of cash paid for:
 
 
 
Income taxes, net of refunds
$
22,014

 
$
11,775

Interest
13,772

 
14,462

Supplemental disclosure of noncash investing and financing activities:
 
 
 
Leased assets obtained in exchange for new finance lease liabilities
$
7,718

 
$
5,245

Leased assets obtained in exchange for new operating lease liabilities
21,433

 
28,563

Noncash property, plant and equipment additions
7,594

 
9,054

Notes payable and other financing obligations, including notes issued and debt assumed in connection with business acquisitions and disposals
6,136

 
8,424

Notes receivable acquired in connection with disposal of business
7,994

 

Contingent consideration liabilities
2,933

 


The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
6




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Stockholders' Equity
(In thousands)
 
LKQ Stockholders
 
 
 
 
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling Interest
 
Total Stockholders' Equity
 
Shares
 
Amount
 
Shares
 
Amount
BALANCE, January 1, 2020
319,927

 
$
3,199

 
(13,196
)
 
$
(351,813
)
 
$
1,418,239

 
$
4,140,136

 
$
(200,885
)
 
$
39,704

 
$
5,048,580

Net income

 

 

 

 

 
145,136

 

 
843

 
145,979

Other comprehensive loss

 

 

 

 

 

 
(113,018
)
 

 
(113,018
)
Purchase of treasury stock

 

 
(3,300
)
 
(88,006
)
 

 

 

 

 
(88,006
)
Vesting of restricted stock units, net of shares withheld for employee tax
400

 
4

 

 

 
(2,073
)
 

 

 

 
(2,069
)
Stock-based compensation expense

 

 

 

 
7,968

 

 

 

 
7,968

Exercise of stock options
112

 
1

 

 

 
1,466

 

 

 

 
1,467

Capital contributions from, net of dividends declared to, noncontrolling interest shareholder

 

 

 

 

 

 

 
341

 
341

Adoption of ASU 2016-13 (see Note 3)

 

 

 

 

 
(2,519
)
 

 

 
(2,519
)
Disposition of subsidiary with noncontrolling interests(1)

 

 

 

 

 

 

 
(11,404
)
 
(11,404
)
BALANCE, March 31, 2020
320,439

 
$
3,204

 
(16,496
)
 
$
(439,819
)
 
$
1,425,600

 
$
4,282,753

 
$
(313,903
)
 
$
29,484

 
$
4,987,319

(1) The amount disposed of in 2020 relates to discontinued operations. See Note 2, "Discontinued Operations," for further information.

 
LKQ Stockholders
 
 
 
 
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling Interest
 
Total Stockholders' Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
BALANCE, January 1, 2019
318,418

 
$
3,184

 
(2,272
)
 
$
(60,000
)
 
$
1,415,188

 
$
3,598,876

 
$
(174,950
)
 
$
56,454

 
$
4,838,752

Net income

 

 

 

 

 
98,048

 

 
1,015

 
99,063

Other comprehensive loss

 

 

 

 

 

 
(15,904
)
 

 
(15,904
)
Purchase of treasury stock

 

 
(2,643
)
 
(70,462
)
 

 

 

 

 
(70,462
)
Vesting of restricted stock units, net of shares withheld for employee tax
303

 
3

 

 

 
(1,080
)
 

 

 

 
(1,077
)
Stock-based compensation expense

 

 

 

 
5,673

 

 

 

 
5,673

Exercise of stock options
183

 
2

 

 

 
1,332

 

 

 

 
1,334

Tax withholdings related to net share settlements of stock-based compensation awards
(15
)
 

 

 

 
(428
)
 

 

 

 
(428
)
Dividends declared to noncontrolling interest shareholder

 

 

 

 

 

 

 
(177
)
 
(177
)
BALANCE, March 31, 2019
318,889

 
$
3,189


(4,915
)

$
(130,462
)
 
$
1,420,685

 
$
3,696,924

 
$
(190,854
)
 
$
57,292

 
$
4,856,774



The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
7




LKQ CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements represent the consolidation of LKQ Corporation, a Delaware corporation, and its subsidiaries. LKQ Corporation is a holding company and all operations are conducted by subsidiaries. When the terms "LKQ," "the Company," "we," "us," or "our" are used in this document, those terms refer to LKQ Corporation and its consolidated subsidiaries.
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to interim financial statements. Accordingly, certain information related to our significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted. These unaudited condensed consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normally recurring adjustments) necessary to fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Operating results for interim periods are not necessarily indicative of the results that can be expected for any subsequent interim period or for a full year. These interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 27, 2020 ("2019 Form 10-K").
The coronavirus disease 2019 ("COVID-19") pandemic and the resulting governmental actions taken to control the virus have impacted, and are expected to continue to impact, our business in 2020. The effects include, but are not limited to, a reduction in demand for our products and services, liquidity challenges for certain of our customers and suppliers, and organizational changes, such as personnel reductions and route consolidation, driven by cost actions to mitigate the expected revenue decline. We have considered COVID-19 impacts in the preparation of our financial statements and footnotes as of and for the three months ended March 31, 2020. Specific disclosures are presented in the following footnotes as applicable.
The ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on future developments, including the severity and duration of the pandemic and the related impact on the global economy, which are uncertain and cannot be predicted at this time.

 

8



Note 2. Discontinued Operations
On May 30, 2018, we acquired Stahlgruber GmbH ("Stahlgruber"), a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories with operations in Germany, Austria, Italy, Slovenia, and Croatia, with further sales to Switzerland. Prior to closing, on May 3, 2018, the European Commission cleared the acquisition of Stahlgruber for the entire European Union, except with respect to the wholesale automotive parts business in the Czech Republic. The acquisition of Stahlgruber’s Czech Republic wholesale business was referred to the Czech Republic competition authority for review. On May 10, 2019, the Czech Republic competition authority approved our acquisition of Stahlgruber’s Czech Republic wholesale business subject to the requirement that we divest certain of the acquired locations. We acquired Stahlgruber’s Czech Republic wholesale business on May 29, 2019 and decided to divest all of the acquired locations. We immediately classified the business as discontinued operations because the business was never integrated into our Europe segment.
We completed the sale of Stahlgruber's Czech Republic business on February 28, 2020, resulting in a loss on sale of $1 million (presented in Net loss from discontinued operations in the Unaudited Condensed Consolidated Statements of Income). As part of the transaction, we purchased the 48.2% noncontrolling interest from the minority shareholder for a purchase price of €8 million, which included the issuance of €4 million of notes payable, and then concurrently sold 100% of the business for a purchase price of €14 million, which included €7 million of notes receivable. This transaction resulted in a disposition of noncontrolling interest of $11 million. From January 1, 2020 through the date of sale, we recorded an immaterial amount of net income (excluding the loss on sale) from discontinued operations related to the business, of which an immaterial amount was attributable to the noncontrolling interest.
As of December 31, 2019, the assets held for sale, liabilities held for sale, and noncontrolling interest of Stahlgruber's Czech Republic business were recorded within Prepaid expenses and other current assets, Other current liabilities, and Noncontrolling interest, respectively, on the Unaudited Condensed Consolidated Balance Sheets.

Note 3. Financial Statement Information
Allowance for Credit Losses
Management evaluates the aging of customer receivable balances, the financial condition of our customers, historical trends, and macroeconomic factors to estimate the amount of customer receivables that may not be collected in the future and records a provision it believes is appropriate. Our reserve for expected lifetime credit losses was approximately $60 million and $53 million at March 31, 2020 and December 31, 2019, respectively. The increase in our allowance for credit losses since December 31, 2019 is attributable to the $3 million effect of the adoption of ASU No. 2016-13 (see the Recently Adopted Accounting Pronouncements section below for further detail) and an increase in expected lifetime losses primarily attributable to the downturn in the global economy related to the effects of the COVID-19 pandemic.
Inventories
Inventories consist of the following (in thousands):
 
March 31,
 
December 31,
 
2020
 
2019
Aftermarket and refurbished products
$
2,254,953

 
$
2,297,895

Salvage and remanufactured products
436,132

 
447,908

Manufactured products
27,545

 
26,974

Total inventories
$
2,718,630

 
$
2,772,777


Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of March 31, 2020, manufactured products inventory was composed of $19 million of raw materials, $4 million of work in process, and $5 million of finished goods. As of December 31, 2019, manufactured products inventory was composed of $17 million of raw materials, $3 million of work in process, and $6 million of finished goods.
Net Assets Held for Sale
During 2019, we committed to plans to sell certain businesses in our North America and Europe segments. As a result, these businesses were classified as net assets held for sale and were required to be adjusted to the lower of fair value less cost to sell or carrying value, resulting in an immaterial net reduction of previously reported impairment charges for the three months ended March 31, 2020, and impairment charges totaling $15 million for the three months ended March 31, 2019 (presented in

9



(Gain on disposal of business) and impairment of net assets held for sale in the Unaudited Condensed Consolidated Statements of Income).
As of March 31, 2020, there were $15 million of assets held for sale, including $3 million of goodwill that was reclassified as held for sale related to our Europe segment, and $7 million of liabilities held for sale, which were recorded within Prepaid expenses and other current assets and Other current liabilities, respectively, on the Unaudited Condensed Consolidated Balance Sheets. We expect the assets held for sale to be disposed of during the next twelve months. The assets held for sale generated annualized revenue of approximately $81 million during the twelve-month period ended March 31, 2020.
We are required to record net assets of our held for sale businesses at the lower of fair value less cost to sell or carrying value. Fair values were based on projected discounted cash flows and/or estimated selling prices. Management's assumptions for our discounted cash flow analysis of the businesses were based on projected revenues and profits, tax rates, capital expenditures, working capital requirements and discount rates. For businesses for which we utilized estimated selling prices to calculate the fair value, the inputs to our estimates included projected market multiples and any reasonable offers. Due to uncertainties in the estimation process, it is possible that actual results could differ from the estimates used in our analysis. The inputs utilized in the fair value estimates are classified as Level 3 within the fair value hierarchy. The fair values of the net assets were measured on a non-recurring basis as of March 31, 2020.
Intangible Assets
Goodwill is tested for impairment at least annually, and we performed our annual impairment tests during the fourth quarter of 2019. Goodwill impairment testing may also be performed on an interim basis when events or circumstances arise that may lead to impairment. LKQ’s market capitalization declined by roughly 40% between February 20, 2020, when the Company released its 2019 financial results, and March 31, 2020. While we believe that the decrease was driven by market reaction to COVID-19, the magnitude of the market capitalization decrease was deemed to be a triggering event requiring an interim test of goodwill impairment.
The fair value estimates of our reporting units are established using weightings of the results of a discounted cash flow methodology and a comparative market multiples approach. Our projections for the interim impairment test assumed that the COVID-19 impact would be severe, with revenue down by as much as 50% in the second quarter of 2020 compared to our prior forecast used in the 2019 impairment analysis, but temporary, as revenue would improve gradually in the second half of 2020. We expect that cost mitigation actions and cash preservation measures will dampen the negative impact of the projected revenue decline.
Based on the annual goodwill impairment test in 2019, we determined no impairment existed as of the date of that test, as all of our reporting units had a fair value estimate which exceeded the carrying value by at least 25%. The fair values of each of our reporting units have since declined relative to the 2019 test, but in the interim test in the first quarter of 2020, we determined no impairments existed as all reporting units had a fair value estimate that exceeded the carrying value by at least 12%, the level at which our Europe reporting unit exceeded its carrying value.
As the economic impact of the pandemic will be dependent on variables that are difficult to project and in many cases are outside of our control, it is possible that the estimates underlying our interim impairment test may change materially in the next year. Since we prepared the interim impairment analysis in early April, actual revenue has trended favorably relative to our forecast. In the event conditions change that affect our ability to realize the underlying cash flows associated with our goodwill, we may record an impairment charge. As of March 31, 2020, the carrying value of our goodwill was $4.3 billion.
We review indefinite-lived intangible assets for impairment annually or on an interim basis if events or changes in circumstances indicate that the carrying value may not be recoverable. We determined that the effect of the uncertainty relating to the COVID-19 pandemic on our forecasted results represented a change in circumstances indicating that the carrying value of the Warn Industries, Inc. ("Warn") trademark, which is our only indefinite-lived intangible asset, may not be recoverable. As a result, we performed a quantitative impairment test in the first quarter as of March 31, 2020 using the relief-from-royalty method and determined no impairment existed, as the trademark had a fair value estimate which exceeded the carrying value by approximately 9%. As of March 31, 2020, the carrying value of the trademark was $81 million.
Investments in Unconsolidated Subsidiaries
Our investment in unconsolidated subsidiaries was $146 million and $139 million as of March 31, 2020 and December 31, 2019, respectively.
Europe Segment
Our investment in unconsolidated subsidiaries in Europe was $127 million and $122 million as of March 31, 2020 and December 31, 2019, respectively. We recorded equity in earnings of $1 million and equity in losses of $41 million during the

10



three months ended March 31, 2020 and March 31, 2019, respectively, mainly related to our investment in Mekonomen AB ("Mekonomen").
On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen for an aggregate purchase price of $181 million. In October 2018, we acquired an additional $48 million of equity in Mekonomen at a discounted share price as part of its rights issue, increasing our equity interest to 26.6%. We are accounting for our interest in Mekonomen using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over the investee. As of March 31, 2020, our share of the book value of Mekonomen's net assets exceeded the book value of our investment in Mekonomen by $6 million; this difference is primarily related to Mekonomen's Accumulated Other Comprehensive Income balance as of our acquisition date in 2016. We are recording our equity in the net earnings of Mekonomen on a one quarter lag.
During the three months ended March 31, 2019, we recognized an other-than-temporary impairment charge of $40 million, which represented the difference in the carrying value and the fair value of our investment in Mekonomen. The fair value of our investment in Mekonomen was determined using the Mekonomen share price of SEK 65 as of March 31, 2019. The impairment charge was recorded in Equity in earnings (losses) of unconsolidated subsidiaries in our Unaudited Condensed Consolidated Statements of Income.
Mekonomen announced in March 2020 that it would not make a dividend payment in 2020. The Level 1 fair value of our equity investment in the publicly traded Mekonomen common stock at March 31, 2020 was $67 million (using the Mekonomen share price of SEK 44 as of March 31, 2020) compared to a carrying value of $116 million. We evaluated our investment in Mekonomen for other-than-temporary impairment and concluded the decline in fair value was not other-than-temporary, however, a prolonged impairment may cause us to account for the decline as an other-than-temporary impairment in a future period, resulting in a charge in our Unaudited Condensed Consolidated Statements of Income.     
North America Segment
Our investment in unconsolidated subsidiaries in the North America segment was $19 million and $18 million as of March 31, 2020 and December 31, 2019, respectively. We recorded equity in losses of an immaterial amount and equity in earnings of $1 million during the three months ended March 31, 2020 and March 31, 2019, respectively, related to our North America equity investments.
Warranty Reserve
Some of our salvage mechanical products are sold with a standard six month warranty against defects. Additionally, some of our remanufactured engines are sold with a standard three or four year warranty against defects. We also provide a limited lifetime warranty for certain of our aftermarket products. These assurance-type warranties are not considered a separate performance obligation, and thus no transaction price is allocated to them. We record the warranty costs in Cost of goods sold in our Unaudited Condensed Consolidated Statements of Income. Our warranty reserve is calculated using historical claim information to project future warranty claims activity and is recorded within Other accrued expenses and Other noncurrent liabilities on our Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments.
The changes in the warranty reserve are as follows (in thousands):
Balance as of December 31, 2019
$
25,441

Warranty expense
16,531

Warranty claims
(14,898
)
Balance as of March 31, 2020
$
27,074


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.
Stockholders' Equity
Treasury Stock
As of December 31, 2019, our Board of Directors had authorized a stock repurchase program under which we may purchase up to $1.0 billion of our common stock from time to time through October 25, 2022. Repurchases under the program may be made in the open market or in privately negotiated transactions, with the amount and timing of repurchases depending on market conditions and corporate needs. The repurchase program does not obligate us to acquire any specific number of shares and may be suspended or discontinued at any time. Delaware law imposes restrictions on stock repurchases.

11



During the three months ended March 31, 2020, we repurchased 3.3 million shares of common stock for an aggregate price of $88 million. During the three months ended March 31, 2019, we repurchased 2.6 million shares of common stock for an aggregate price of $70 million. As of March 31, 2020, there was $560 million of remaining capacity under our repurchase program. Repurchased shares are accounted for as treasury stock using the cost method.
Noncontrolling Interest
In February 2020, as part of the sale of Stahlgruber's Czech Republic business, we divested the noncontrolling interest of the business, which resulted in a net decrease to Noncontrolling interest of $11 million in our unaudited condensed consolidated financial statements as of March 31, 2020. See Note 2, "Discontinued Operations," for further information.
In December 2019, we modified the shares representing a noncontrolling interest in a subsidiary acquired in connection with the Stahlgruber acquisition and issued new redeemable shares to the minority shareholder. The new redeemable shares contain (i) a put option for all noncontrolling interest shares at a fixed price of $24 million (€21 million) exercisable by the minority shareholder in the fourth quarter of 2023, (ii) a call option for all noncontrolling interest shares at a fixed price of $26 million (€23 million) exercisable by the Company beginning in the first quarter of 2026 through the end of the fourth quarter of 2027, and (iii) a guaranteed dividend to be paid quarterly to the minority shareholder through the fourth quarter of 2023. The new redeemable shares do not provide the minority shareholder with rights to participate in the profits and losses of the subsidiary prior to the exercise date of the put option. As the put option is outside the control of the Company, we recorded a $24 million Redeemable noncontrolling interest at the put option's exercise value outside of permanent equity on our Unaudited Condensed Consolidated Balance Sheets.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements    
During the first quarter of 2020, we adopted ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), and ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses" ("ASU 2018-19"). ASU 2016-13 significantly changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the prior “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. ASU 2018-19 affects loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope of this amendment that represent the contractual right to receive cash. We applied ASU 2016-13 and ASU 2018-19 on a modified retrospective basis. As of January 1, 2020, we recorded a cumulative effect adjustment to retained earnings of $3 million.
During the first quarter of 2020, we adopted ASU No. 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"), which removes, modifies, and adds certain disclosure requirements in ASC 820. We adopted the provisions of ASU 2018-13 by applying a prospective approach. The adoption of ASU 2018-13 did not have a material impact on our unaudited condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, "Income Taxes" (Topic 740) ("ASU 2019-12"), which simplifies the accounting for income taxes and adds guidance to reduce complexity in certain areas. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of this standard on our consolidated financial statements.    
In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"), which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. ASU 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made (i.e. as early as the first quarter 2020). Unlike other topics, the provisions of this update are only available until December 31, 2022, when the reference rate replacement activity is expected to have been completed. We are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures, and we have not yet elected an adoption date.


12



Note 4. Revenue Recognition
The majority of our revenue is derived from the sale of vehicle parts. We recognize revenue when the products are shipped to, delivered to or picked up by customers, which is the point when title has transferred and risk of ownership has passed.
Sources of Revenue
We report our revenue in two categories: (i) parts and services and (ii) other. The following table sets forth our revenue by category, with our parts and services revenue further disaggregated by reportable segment (in thousands):
 
Three Months Ended
 
March 31,
 
2020
 
2019
North America
$
1,107,342

 
$
1,155,698

Europe
1,357,969

 
1,440,841

Specialty
347,406

 
352,556

Parts and services
2,812,717

 
2,949,095

Other
188,218

 
151,208

Total revenue
$
3,000,935

 
$
3,100,303


Parts and Services
Our parts revenue is generated from the sale of vehicle products including replacement parts, components and systems used in the repair and maintenance of vehicles and specialty products and accessories to improve the performance, functionality and appearance of vehicles. Services revenue includes (i) additional services that are generally billed concurrently with the related product sales, such as the sale of service-type warranties, (ii) fees for admission to our self service yards, and (iii) diagnostic and repair services.
In North America, our vehicle replacement products include sheet metal collision parts such as doors, hoods, and fenders; bumper covers; head and tail lamps; automotive glass products such as windshields; mirrors and grilles; wheels; and large mechanical items such as engines and transmissions. In Europe, our products include a wide variety of small mechanical products such as brake pads, discs and sensors; clutches; electrical products such as spark plugs and batteries; steering and suspension products; filters; and oil and automotive fluids. In our Specialty operations, we serve six product segments: truck and off-road; speed and performance; RV; towing; wheels, tires and performance handling; and miscellaneous accessories. 
Our service-type warranties typically have service periods ranging from 6 months to 36 months. Under FASB Accounting Standards Codification Topic 606 ("ASC 606"), proceeds from these service-type warranties are deferred at contract inception and amortized on a straight-line basis to revenue over the contract period. The changes in deferred service-type warranty revenue are as follows (in thousands):
Balance as of January 1, 2020
$
27,067

Additional warranty revenue deferred
11,086

Warranty revenue recognized
(11,353
)
Balance as of March 31, 2020
$
26,800


Other Revenue
Revenue from other sources includes sales of scrap and precious metals (platinum, palladium, and rhodium), bulk sales to mechanical manufacturers (including cores) and sales of aluminum ingots and sows from our furnace operations. We derive scrap metal and other precious metals from several sources, including vehicles that have been used in both our wholesale and self service recycling operations and from original equipment manufacturers ("OEMs") and other entities that contract with us for secure disposal of "crush only" vehicles. Revenue from the sale of hulks in our wholesale and self service recycling operations is recognized based on a price per ton of delivered material when the customer (processor) collects the scrap. Some adjustments may occur when the customer weighs the scrap at their location, and revenue is adjusted accordingly.
Revenue by Geographic Area
See Note 14, "Segment and Geographic Information" for information related to our revenue by geographic region.

13



Variable Consideration
The amount of revenue ultimately received from the customer can vary due to variable consideration including returns, discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items. Under ASC 606 we are required to select the “expected value method” or the “most likely amount” method in order to estimate variable consideration. We utilize both methods in practice depending on the type of variable consideration, with contemplation of any expected reversals in revenue. We recorded a refund liability and return asset for expected returns of $100 million and $56 million, respectively, as of March 31, 2020, and $97 million and $52 million, respectively, as of December 31, 2019. The refund liability is presented separately on the Unaudited Condensed Consolidated Balance Sheets within current liabilities while the return asset is presented within Prepaid expenses and other current assets. Other types of variable consideration consist primarily of discounts, volume rebates, and other customer sales incentives that are recorded in Receivables, net on the Unaudited Condensed Consolidated Balance Sheets. We recorded a reserve for our variable consideration of $67 million and $108 million as of March 31, 2020 and December 31, 2019, respectively. While other customer incentive programs exist, we characterize them as material rights in the context of our sales transactions. We consider these programs to be immaterial to our unaudited condensed consolidated financial statements.

Note 5. Restructuring and Acquisition Related Expenses
2019 Global Restructuring Program
In the second quarter of 2019, we began implementing a cost reduction initiative, covering all three of our reportable segments, designed to eliminate underperforming assets and cost inefficiencies. We have incurred and expect to incur costs for inventory write-downs, employee severance and other expenditures related to employee terminations; lease exit costs, such as lease termination fees, accelerated amortization of operating lease assets and impairment of operating lease assets; other costs related to facility exits, such as moving expenses to relocate inventory and equipment; and accelerated depreciation of fixed assets to be disposed of earlier than the end of the previously estimated useful lives.
During the three months ended March 31, 2020, we incurred $3 million of restructuring expenses under this program, primarily related to facility exit costs and employee-related costs. These costs were recorded within Restructuring and acquisition related expenses in the Unaudited Condensed Consolidated Statement of Income during the three months ended March 31, 2020. We expect to incur up to an additional $5 million of expense during the remainder of 2020 to complete the program, for total program costs of $45 million ($37 million was incurred during the year ended December 31, 2019).
2020 Global Restructuring Program
Beginning in the first quarter of 2020, we initiated a further restructuring program aimed at cost reductions across all our reportable segments through the elimination of underperforming assets and cost inefficiencies. These actions are incremental to those initiated as part of the 2019 Global Restructuring Program, and will include costs for inventory write-downs, employee severance and other expenditures related to employee terminations; lease exit costs, such as lease termination fees, accelerated amortization of operating lease assets and impairment of operating lease assets; other costs related to facility exits, such as moving expenses to relocate inventory and equipment; and accelerated depreciation of fixed assets to be disposed of earlier than the end of the previously estimated useful lives. We currently estimate we will incur between $50 million and $60 million under this program, and we recognized $2 million during the three months ended March 31, 2020. We may expand this program during the remainder of 2020 as we continue to analyze our cost structure for additional opportunities to eliminate inefficiencies, including actions in response to impacts to the business from COVID-19. These actions may include additional facility closures and severance for employee terminations based on an assessment of projected demand and strategic priorities.
Acquisition Integration Plans
During the three months ended March 31, 2020 and 2019, we incurred $2 million and $3 million of restructuring expenses, respectively, for our acquisition integration plans. These expenses included $1 million and $2 million during the three months ended March 31, 2020 and 2019, respectively, related to the integration of our acquisition of Andrew Page Limited ("Andrew Page"). Future expenses to complete these integration plans are expected to be less than $5 million.
1 LKQ Europe Program
In September 2019, we announced a multi-year program called "1 LKQ Europe" which is intended to create structural centralization and standardization of key functions to facilitate the operation of the Europe segment as a single business. Under the 1 LKQ Europe program, we will reorganize our non-customer-facing teams and support systems through various projects including the implementation of a common ERP platform, rationalization of our product portfolio, and creation of a Europe headquarters office and central back office. We continue to expect to incur between $45 million and $55 million in personnel and inventory related restructuring charges through 2024 as a result of executing the 1 LKQ Europe program. While certain projects are currently delayed in response to the COVID-19 pandemic, we expect to continue the program once the impacts on our business from COVID-19 have stabilized, although the initiatives and projects included in the program, and our estimates

14



of the related expenditures and timelines, may change in the future depending on the duration and severity of COVID-19 impacts on our business. We may also identify additional initiatives and projects under the 1 LKQ Europe program in future periods that may result in additional restructuring expense, although we are currently unable to estimate the range of charges for such potential future initiatives and projects.

Note 6. Stock-Based Compensation
In order to attract and retain employees, non-employee directors, consultants, and other persons associated with us, we grant equity-based awards under the LKQ Corporation 1998 Equity Incentive Plan (the “Equity Incentive Plan”). We have granted restricted stock units ("RSUs"), stock options, and restricted stock under the Equity Incentive Plan. We expect to issue new or treasury shares of common stock to cover past and future equity grants.
RSUs
The RSUs we have issued vest over periods of up to five years, subject to a continued service condition. Currently outstanding RSUs (other than PSUs, which are described below) contain either a time-based vesting condition or a combination of a performance-based vesting condition and a time-based vesting condition, in which case both conditions must be met before any RSUs vest. For all of the RSUs containing a performance-based vesting condition, the Company must report positive diluted earnings per share, subject to certain adjustments, during any fiscal year period within five years following the grant date. Each RSU converts into one share of LKQ common stock on the applicable vesting date. The grant date fair value of RSUs is based on the market price of LKQ stock on the grant date.
Starting with our 2019 grants, participants who are eligible for retirement (defined as a voluntary separation of service from the Company after the participant has attained at least 60 years of age and completed at least five years of service) will continue to vest in their awards following retirement; if retirement occurs during the first year of the vesting period (for RSUs subject to a time-based vesting condition) or the first year of the performance period (for RSUs with a performance-based vesting condition), the participant vests in a prorated amount of the RSU grant based on the portion of the year employed. For our RSU grants prior to 2019, participants forfeit their unvested shares upon retirement.
The fair value of RSUs that vested during the three months ended March 31, 2020 was $15 million; the fair value of RSUs vested is based on the market price of LKQ stock on the date vested.
The following table summarizes activity related to our RSUs under the Equity Incentive Plan for the three months ended March 31, 2020:
 
Number
Outstanding
 
Weighted
Average
Grant Date
Fair Value
 
Weighted Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
   (in thousands) (1)
Unvested as of January 1, 2020
1,612,026

 
$
31.72

 
 
 
 
Granted 
777,439

 
$
33.14

 
 
 
 
Vested
(472,192
)
 
$
30.98

 
 
 
 
Forfeited / Canceled
(12,173
)
 
$
33.64

 
 
 
 
Unvested as of March 31, 2020
1,905,100

 
$
32.47

 
 
 
 
Expected to vest after March 31, 2020
1,777,842

 
$
32.55

 
3.3
 
$
36,463


(1)
The aggregate intrinsic value of expected to vest RSUs represents the total pretax intrinsic value (the fair value of the Company's stock on the last day of each period multiplied by the number of units) that would have been received by the holders had all RSUs vested. This amount changes based on the market price of the Company’s common stock.

In 2019 and 2020, we granted performance-based three-year RSUs ("PSUs") to certain employees, including our executive officers, under our Equity Incentive Plan. As these awards are performance-based, the exact number of shares to be paid out may be up to twice the grant amount, depending on the Company's performance and the achievement of certain performance metrics (adjusted earnings per share, average organic parts and services revenue growth, and average return on invested capital) over the applicable three year performance periods.




15



The following table summarizes activity related to our PSUs under the Equity Incentive Plan for the three months ended March 31, 2020:
 
Number
Outstanding
 
Weighted
Average
Grant Date
Fair Value
 
Weighted Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
   (in thousands) (1)
Unvested as of January 1, 2020
136,170

 
$
27.69

 
 
 
 
Granted  (2)
159,683

 
$
32.21

 
 
 
 
Unvested as of March 31, 2020
295,853

 
$
30.13

 
 
 
 
Expected to vest after March 31, 2020
295,853

 
$
30.13

 
2.2
 
$
6,068


(1)
The aggregate intrinsic value of expected to vest PSUs represents the total pretax intrinsic value (the fair value of the Company's stock on the last day of each period multiplied by the number of units at target) that would have been received by the holders had all PSUs vested. This amount changes based on the market price of the Company’s common stock and the achievement of the performance metrics relative to the established targets.
(2)
Represents the number of PSUs at target payout.
Stock Options
Stock options vested over periods of up to five years, subject to a continued service condition. Stock options expired either six years or ten years from the date they were granted. No options were granted during the three months ended March 31, 2020. No options vested during the three months ended March 31, 2020; all of our outstanding options are fully vested.
The following table summarizes activity related to our stock options under the Equity Incentive Plan for the three months ended March 31, 2020:
 
Number
Outstanding
 
Weighted
Average Exercise Price
 
Weighted Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
   (in thousands)
Balance as of January 1, 2020
114,594

 
$
12.26

 
 
 
 
Exercised
(112,472
)
 
$
11.88

 
 
 
$
2,629

Canceled
(2,122
)
 
$
32.31

 
 
 
 
Balance as of March 31, 2020

 
$

 

 
$


All stock options have been exercised or canceled as of March 31, 2020.
Stock-Based Compensation Expense
Pre-tax stock-based compensation expense for RSUs and PSUs totaled $8 million and $6 million, respectively, for the three months ended March 31, 2020 and 2019. As of March 31, 2020, unrecognized compensation expense related to unvested RSUs and PSUs was $59 million. 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 target.


16



Note 7. Earnings Per Share
The following chart sets forth the computation of earnings per share (in thousands, except per share amounts):
 
Three Months Ended
 
March 31,
 
2020
 
2019
Income from continuing operations
$
146,894

 
$
99,063

Denominator for basic earnings per share—Weighted-average shares outstanding
306,238

 
315,046

Effect of dilutive securities:
 
 
 
RSUs
515

 
414

PSUs

 

Stock options
4

 
558

Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding
306,757

 
316,018

Basic earnings per share from continuing operations
$
0.48

 
$
0.31

Diluted earnings per share from continuing operations (1)
$
0.48

 
$
0.31


(1)
Diluted earnings per share from continuing operations was computed using the treasury stock method for dilutive securities.
The following table sets forth the number of employee stock-based compensation awards outstanding but not included in the computation of diluted earnings per share because their effect would have been antidilutive for the three months ended March 31, 2020 and 2019 (in thousands):
 
Three Months Ended
 
March 31,
 
2020
 
2019
Antidilutive securities:
 
 
 
RSUs
381

 
599

Stock options

 
32




17



Note 8. Accumulated Other Comprehensive Income (Loss)
The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands):
 
 
Three Months Ended
 
 
March 31, 2020
 
 
Foreign
Currency
Translation
 
Unrealized Gain (Loss)
on Cash Flow Hedges
 
Unrealized (Loss) Gain
on Pension Plans
 
Other Comprehensive Loss from Unconsolidated Subsidiaries
 
Accumulated
Other
Comprehensive
(Loss) Income
Beginning balance
 
$
(170,893
)
 
$
5,358

 
$
(31,934
)
 
$
(3,416
)
 
$
(200,885
)
Pretax (loss) income
 
(104,060
)
 
4,182

 

 

 
(99,878
)
Income tax effect
 

 
(984
)
 

 

 
(984
)
Reclassification of unrealized (gain) loss
 

 
(13,707
)
 
114

 

 
(13,593
)
Reclassification of deferred income taxes
 

 
3,188

 
6

 

 
3,194

Disposal of business
 
95

 

 

 

 
95

Other comprehensive loss from unconsolidated subsidiaries
 

 

 

 
(1,852
)
 
(1,852
)
Ending balance
 
$
(274,858
)
 
$
(1,963
)
 
$
(31,814
)
 
$
(5,268
)
 
$
(313,903
)

 
 
Three Months Ended
 
 
March 31, 2019
 
 
Foreign
Currency
Translation
 
Unrealized Gain (Loss)
on Cash Flow Hedges
 
Unrealized (Loss) Gain
on Pension Plans
 
Other Comprehensive Loss from Unconsolidated Subsidiaries
 
Accumulated
Other
Comprehensive
(Loss) Income
Beginning balance
 
$
(177,597
)
 
$
14,374

 
$
(8,075
)
 
$
(3,652
)
 
$
(174,950
)
Pretax (loss) income
 
(9,895
)
 
15,593

 

 

 
5,698

Income tax effect
 

 
(3,654
)
 

 

 
(3,654
)
Reclassification of unrealized (gain) loss
 

 
(19,188
)
 
253

 

 
(18,935
)
Reclassification of deferred income taxes
 

 
4,512

 
(62
)
 

 
4,450

Other comprehensive loss from unconsolidated subsidiaries
 

 

 

 
(3,463
)
 
(3,463
)
Ending balance
 
$
(187,492
)

$
11,637


$
(7,884
)

$
(7,115
)

$
(190,854
)
The amounts of unrealized gains and losses on our Cash Flow Hedges reclassified to our Unaudited Condensed Consolidated Statements of Income are as follows (in thousands):
 
 
 
 
Three Months Ended
 
 
 
 
March 31,
 
 
Classification
 
2020
 
2019
Unrealized gains on interest rate swaps
 
Interest expense, net of interest income
 
$
3,296

 
$
1,692

Unrealized gains on cross currency swaps
 
Interest expense, net of interest income
 
2,551

 
4,330

Unrealized gains on cross currency swaps (1)
 
Other income, net
 
7,860

 
13,166

Total
 
 
 
$
13,707

 
$
19,188

(1)
The amounts reclassified to Other income, net in our Unaudited Condensed Consolidated Statements of Income offset the impact of the remeasurement of the underlying transactions.
Net unrealized losses related to our pension plans were reclassified to Other income, net in our Consolidated Statements of Income for the three months ended March 31, 2020 and 2019.
Our policy is to reclassify the income tax effect from Accumulated other comprehensive income (loss) to the Provision for income taxes when the related gains and losses are released to the Unaudited Condensed Consolidated Statements of Income.

18




Note 9. Long-Term Obligations
Long-term obligations consist of the following (in thousands):
 
March 31,
 
December 31,
 
2020
 
2019
Senior secured credit agreement:
 
 
 
Term loans payable
$
336,875

 
$
341,250

Revolving credit facilities
1,562,875

 
1,268,008

U.S. Notes (2023)

 
600,000

Euro Notes (2024)
551,550

 
560,650

Euro Notes (2026/28)
1,103,100

 
1,121,300

Receivables securitization facility
98,400

 

Notes payable through October 2030 at weighted average interest rates of 3.5% and 3.2%, respectively
30,164

 
26,971

Finance lease obligations at weighted average interest rates of 3.9% and 4.1%, respectively
44,386

 
40,837

Other debt at weighted average interest rates of 2.1% and 1.8%, respectively
61,205

 
113,010

Total debt
3,788,555


4,072,026

Less: long-term debt issuance costs
(25,093
)
 
(29,990
)
Less: current debt issuance costs
(276
)
 
(280
)
Total debt, net of debt issuance costs
3,763,186


4,041,756

Less: current maturities, net of debt issuance costs
(90,965
)
 
(326,367
)
Long term debt, net of debt issuance costs
$
3,672,221


$
3,715,389


Senior Secured Credit Agreement
On November 20, 2018, LKQ Corporation, LKQ Delaware LLP, and certain other subsidiaries (collectively, the "Borrowers") entered into Amendment No. 3 to the Fourth Amended and Restated Credit Agreement ("Credit Agreement"), which amended the Fourth Amended and Restated Credit Agreement dated January 29, 2016 by modifying certain terms to (1) increase the total availability under the revolving credit facility's multicurrency component from $2.75 billion to $3.15 billion; (2) reduce the margin on borrowings by 25 basis points at the September 30, 2018 leverage ratio, and reduce the number of leverage pricing tiers; (3) extend the maturity date by one year to January 29, 2024; (4) reduce the unused facility fee depending on leverage category; (5) increase the capacity for incurring additional indebtedness under our receivables securitization facility; (6) increase the maximum borrowing limit of swingline loans and add the ability to borrow in British Pounds and Euros; and (7) make other immaterial or clarifying modifications and amendments to the terms of the Credit Agreement. Borrowings will continue to bear interest at variable rates.
Amounts outstanding under the revolving credit facility are due and payable upon maturity of the Credit Agreement on January 29, 2024. Term loan borrowings, which totaled $337 million as of March 31, 2020, are due and payable in quarterly installments equal to approximately $4 million on the last day of each fiscal quarter, with the remaining balance due and payable on January 29, 2024.
We are required to prepay the term loan by amounts equal to proceeds from the sale or disposition of certain assets if the proceeds are not reinvested within twelve months. We also have the option to prepay outstanding amounts under the Credit Agreement without penalty.
The Credit Agreement contains customary representations and warranties and customary covenants that provide limitations and conditions on our ability to enter into certain transactions. The Credit Agreement also contains financial and affirmative covenants, including limitations on our net leverage ratio and a minimum interest coverage ratio.
Borrowings under the Credit Agreement bear interest at variable rates, which depend on the currency and duration of the borrowing elected, plus an applicable margin. The applicable margin is subject to change in increments of 0.25% depending on our net leverage ratio. Interest payments are due on the last day of the selected interest period or quarterly in arrears depending on the type of borrowing. Including the effect of the interest rate swap agreements described in Note 10, "Derivative Instruments and Hedging Activities," the weighted average interest rates on borrowings outstanding under the Credit Agreement at March 31, 2020 and December 31, 2019 were 1.6% at each date. We also pay a commitment fee based on the average daily unused amount of the revolving credit facilities. The commitment fee is subject to change in increments of 0.05%

19



depending on our net leverage ratio. In addition, we pay a participation commission on outstanding letters of credit at an applicable rate based on our net leverage ratio, and a fronting fee of 0.125% to the issuing bank, which are due quarterly in arrears.
Of the total borrowings outstanding under the Credit Agreement, there were $18 million classified as current maturities at both March 31, 2020 and December 31, 2019. As of March 31, 2020, there were letters of credit outstanding in the aggregate amount of $70 million. The amounts available under the revolving credit facilities are reduced by the amounts outstanding under letters of credit, and thus availability under the revolving credit facilities at March 31, 2020 was $1.5 billion.
Related to the execution of Amendment No. 3 to the Fourth Amended and Restated Credit Agreement in November 2018, we incurred $4 million of fees, the majority of which were capitalized as an offset to Long-Term Obligations and are amortized over the term of the agreement.
U.S. Notes (2023)
In 2013, we issued $600 million aggregate principal amount of 4.75% senior notes due 2023 (the "U.S. Notes (2023)"). The U.S. Notes (2023) were governed by the Indenture dated as of May 9, 2013 (the "U.S. Notes (2023) Indenture") among LKQ Corporation, certain of our subsidiaries (the "Guarantors"), the trustee, paying agent, transfer agent and registrar. The U.S. Notes (2023) were registered under the Securities Act of 1933.
The U.S. Notes (2023) bore interest at a rate of 4.75% per year from the most recent payment date on which interest had been paid or provided for. Interest on the U.S. Notes (2023) was payable in arrears on May 15 and November 15 of each year. The U.S. Notes (2023) were fully and unconditionally guaranteed, jointly and severally, by the Guarantors.
The U.S. Notes (2023) and the related guarantees were, respectively, LKQ Corporation's and each Guarantor's senior unsecured obligations and were subordinated to all of the Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the U.S. Notes (2023) were effectively subordinated to all of the liabilities of our subsidiaries that were not guaranteeing the U.S. Notes (2023) to the extent of the assets of those subsidiaries.
On January 10, 2020, we redeemed the U.S Notes (2023) at a redemption price equal to 101.583% of the principal amount of the U.S. Notes (2023) plus accrued and unpaid interest thereon to, but not including, January 10, 2020. The total redemption payment was $614 million, including an early-redemption premium of $9 million and accrued and unpaid interest of $4 million. In the first quarter of 2020, we recorded a loss on debt extinguishment of $13 million on the Unaudited Condensed Consolidated Statements of Income related to the redemption due to the early-redemption premium and the write-off of the unamortized debt issuance costs.
Euro Notes (2024)
On April 14, 2016, LKQ Italia Bondco S.p.A. ("LKQ Italia"), an indirect, wholly-owned subsidiary of LKQ Corporation, completed an offering of €500 million aggregate principal amount of senior notes due April 1, 2024 (the "Euro Notes (2024)") in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering were used to repay a portion of the revolver borrowings under the Credit Agreement and to pay related fees and expenses. The Euro Notes (2024) are governed by the Indenture dated as of April 14, 2016 (the "Euro Notes (2024) Indenture") among LKQ Italia, LKQ Corporation and certain of our subsidiaries (the "Euro Notes (2024) Subsidiaries"), the trustee, and the paying agent, transfer agent, and registrar.
The Euro Notes (2024) bear interest at a rate of 3.875% per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for. Interest on the Euro Notes (2024) is payable in arrears on April 1 and October 1 of each year. The Euro Notes (2024) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2024) Subsidiaries (the "Euro Notes (2024) Guarantors").
The Euro Notes (2024) and the related guarantees are, respectively, LKQ Italia's and each Euro Notes (2024) Guarantor's senior unsecured obligations and are subordinated to all of LKQ Italia's and the Euro Notes (2024) Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2024) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2024) to the extent of the assets of those subsidiaries. The Euro Notes (2024) have been listed on the ExtraMOT, Professional Segment of the Borsa Italia S.p.A. securities exchange and the Global Exchange Market of Euronext Dublin.
The Euro Notes (2024) are redeemable, in whole or in part, at any time at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus a "make whole" premium. On or after January 1, 2024, we may redeem some or all of the Euro Notes (2024) at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. We may be required to make an offer to purchase the Euro Notes (2024) upon the sale of certain assets, subject to certain exceptions, and upon a change of control. In addition, in

20



the event of certain developments affecting taxation or under certain other circumstances which, in any case, require the payment of certain additional amounts, we may redeem the Euro Notes (2024) in whole, but not in part, at any time at a redemption price of 100% of the principal amount thereof plus accrued but unpaid interest, if any, and such certain additional amounts, if any, to the redemption date.
Euro Notes (2026/28)
On April 9, 2018, LKQ European Holdings B.V. ("LKQ Euro Holdings"), a wholly-owned subsidiary of LKQ Corporation, completed an offering of €1.0 billion aggregate principal amount of senior notes. The offering consisted of €750 million senior notes due 2026 (the "2026 notes") and €250 million senior notes due 2028 (the "2028 notes" and, together with the 2026 notes, the "Euro Notes (2026/28)") in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering, together with borrowings under our senior secured credit facility, were used to (i) finance a portion of the consideration paid for the Stahlgruber acquisition, (ii) for general corporate purposes and (iii) to pay related fees and expenses, including the refinancing of net financial debt. The Euro Notes (2026/28) are governed by the Indenture dated as of April 9, 2018 (the “Euro Notes (2026/28) Indenture”) among LKQ Euro Holdings, LKQ Corporation and certain of our subsidiaries (the “Euro Notes (2026/28) Subsidiaries”), the trustee, paying agent, transfer agent, and registrar.
The 2026 notes and 2028 notes bear interest at rates of 3.625% and 4.125%, respectively, per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for. Interest on the Euro Notes (2026/28) is payable in arrears on April 1 and October 1 of each year. The Euro Notes (2026/28) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2026/28) Subsidiaries (the "Euro Notes (2026/28) Guarantors").
The Euro Notes (2026/28) and the related guarantees are, respectively, LKQ Euro Holdings' and each Euro Notes (2026/28) Guarantor’s senior unsecured obligations and will be subordinated to all of LKQ Euro Holdings' and the Euro Notes (2026/28) Guarantors’ existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2026/28) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2026/28) to the extent of the assets of those subsidiaries. The Euro Notes (2026/28) have been listed on the Global Exchange Market of Euronext Dublin.
The Euro Notes (2026/28) are redeemable, in whole or in part, at any time at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus a "make whole" premium. On or after April 1, 2021, we may redeem some or all of the 2026 notes at the applicable redemption prices set forth in the Euro Notes (2026/28) Indenture. On or after April 1, 2023, we may redeem some or all of the 2028 notes at the applicable redemption prices set forth in the Euro Notes (2026/28) Indenture. We also may redeem up to 35% of the 2026 notes and up to 35% of the 2028 notes before April 1, 2021 with the net cash proceeds from certain equity offerings. We may be required to make an offer to purchase the Euro Notes (2026/28) upon the sale of certain assets, subject to certain exceptions, and upon a change of control. In addition, in the event of certain developments affecting taxation or under certain other circumstances which, in any case, require the payment of certain additional amounts, we may redeem the Euro Notes (2026/28) in whole, but not in part, at any time at a redemption price of 100% of the principal amount thereof, plus accrued but unpaid interest, if any, and such certain additional amounts, if any, to the redemption date.
Related to the execution of the Euro Notes (2026/28) in April 2018, we incurred $16 million of fees, which were capitalized as an offset to Long-Term Obligations and are amortized over the term of the Euro Notes (2026/28).
Receivables Securitization Facility
On December 20, 2018, we amended the terms of our receivables securitization facility with MUFG Bank, Ltd. ("MUFG") (formerly known as The Bank of Tokyo-Mitsubishi UFJ, Ltd.) to: (i) extend the term of the facility to November 8, 2021; (ii) increase the maximum amount available to $110 million; and (iii) make other clarifying and updating changes. Under the facility, LKQ sells an ownership interest in certain receivables, related collections and security interests to MUFG for the benefit of conduit investors and/or financial institutions for cash proceeds. Upon payment of the receivables by customers, rather than remitting to MUFG the amounts collected, LKQ retains such collections as proceeds for the sale of new receivables generated by certain of the ongoing operations of the Company.
The sale of the ownership interest in the receivables is accounted for as a secured borrowing on our Unaudited Condensed Consolidated Balance Sheets, under which the receivables included in the program collateralize the amounts invested by MUFG, the conduit investors and/or financial institutions (the "Purchasers"). The receivables are held by LKQ Receivables Finance Company, LLC ("LRFC"), a wholly owned bankruptcy-remote special purpose subsidiary of LKQ, and therefore, the receivables are available first to satisfy the creditors of LRFC, including the Purchasers. Net receivables totaling

21



$116 million and $132 million were collateral for the investment under the receivables facility as of as March 31, 2020 and December 31, 2019, respectively.
Under the receivables facility, we pay variable interest rates plus a margin on the outstanding amounts invested by the Purchasers. The variable rates are based on (i) commercial paper rates, (ii) London Interbank Offered Rate ("LIBOR"), or (iii) base rates, and are payable monthly in arrears. The commercial paper rate is the applicable variable rate unless conduit investors are not available to invest in the receivables at commercial paper rates. In such case, financial institutions will invest at the LIBOR rate or at base rates. We also pay a commitment fee on the excess of the investment maximum over the average daily outstanding investment, payable monthly in arrears. The outstanding balance was $98 million as of March 31, 2020, and there was no outstanding balance as of December 31, 2019.


Note 10. Derivative Instruments and Hedging Activities
We are exposed to market risks, including the effect of changes in interest rates, foreign currency exchange rates and commodity prices. Under our current policies, we use derivatives to manage our exposure to variable interest rates on our senior secured debt and changing foreign exchange rates for certain foreign currency denominated transactions. We do not hold or issue derivatives for trading purposes.
Cash Flow Hedges
We hold interest rate swap agreements to hedge a portion of the variable interest rate risk on our variable rate borrowings under our Credit Agreement, with the objective of minimizing the impact of interest rate fluctuations and stabilizing cash flows. Under the terms of the interest rate swap agreements, we pay the fixed interest rate and receive payment at a variable rate of interest based on LIBOR for the respective currency of each interest rate swap agreement’s notional amount. Changes in the fair value of the interest rate swap agreements are recorded in Accumulated Other Comprehensive Income (Loss) and are reclassified to Interest expense, net of interest income when the underlying interest payment has an impact on earnings. Our interest rate swap contracts have maturity dates in January 2021 and June 2021.
From time to time, we may hold foreign currency forward contracts related to certain foreign currency denominated intercompany transactions, with the objective of minimizing the impact of fluctuating exchange rates on these future cash flows. Under the terms of the foreign currency forward contracts, we will sell the foreign currency in exchange for U.S. dollars at a fixed rate on the maturity dates of the contracts. Changes in the fair value of the foreign currency forward contracts are recorded in Accumulated Other Comprehensive Income (Loss) and reclassified to Other income, net when the underlying transaction has an impact on earnings.
We hold cross currency swaps, which contain an interest rate swap component and a foreign currency forward contract component that, combined with related intercompany financing arrangements, effectively convert variable rate U.S. dollar-denominated borrowings into fixed rate euro-denominated borrowings. The swaps are intended to minimize the impact of fluctuating exchange rates and interest rates on the cash flows resulting from the related intercompany financing arrangements. Changes in the fair value of the derivative instruments are recorded in Accumulated Other Comprehensive Income (Loss) and are reclassified to Interest expense, net of interest income and Other income, net when the underlying transactions have an impact on earnings. For certain of the swaps, the notional amount steps down by €4 million quarterly, with the balance maturing at the end of the contract. Our cross currency swaps have maturity dates in October 2020 and January 2021.
The activity related to our cash flow hedges is presented in operating activities in our Unaudited Condensed Consolidated Statements of Cash Flows.










22



The following tables summarize the notional amounts and fair values of our designated cash flow hedges as of March 31, 2020 and December 31, 2019 (in thousands):
 
 
Notional Amount
 
Fair Value at March 31, 2020 (USD)
 
 
March 31, 2020
 
Other Current Assets
 
Other Noncurrent Assets
 
Other Accrued Expenses
 
Other Noncurrent Liabilities
Interest rate swap agreements
 
 
 
 
 
 
 
 
USD denominated
 
$
480,000

 
$

 
$

 
$
1,925

 
$
1,316

Cross currency swap agreements
 
 
 
 
 
 
 
 
USD/euro
 
$
462,655

 
4,789

 

 
18,292

 

Total cash flow hedges
 
$
4,789

 
$

 
$
20,217

 
$
1,316


 
 
Notional Amount
 
Fair Value at December 31, 2019 (USD)
 
 
December 31, 2019
 
Other Current Assets
 
Other Noncurrent Assets
 
Other Accrued Expenses
 
Other Noncurrent Liabilities
Interest rate swap agreements
 
 
 
 
 
 
 
 
USD denominated
 
$
480,000

 
$

 
$
3,262

 
$

 
$

Cross currency swap agreements
 
 
 
 
 
 
 
 
USD/euro
 
$
466,621

 
2,975

 
181

 
970

 
23,349

Total cash flow hedges
 
$
2,975

 
$
3,443

 
$
970

 
$
23,349


While certain derivative instruments executed with the same counterparty are subject to master netting arrangements, we present our cash flow hedge derivative instruments on a gross basis on our Unaudited Condensed Consolidated Balance Sheets. The impact of netting the fair values of these contracts would result in a decrease to Prepaid expenses and other current assets and Other accrued expenses on our Unaudited Condensed Consolidated Balance Sheets of $5 million and $1 million at March 31, 2020 and December 31, 2019, respectively. The impact of netting the fair values of these contracts would result in a decrease to Other noncurrent assets and Other noncurrent liabilities on our Unaudited Condensed Consolidated Balance Sheets of $1 million at December 31, 2019; there would be no impact at March 31, 2020.
The activity related to our cash flow hedges is included in Note 8, "Accumulated Other Comprehensive Income (Loss)." As of March 31, 2020, we estimate that we will reclassify $2 million of derivative gains (net of tax) from Accumulated Other Comprehensive Income (Loss) to Interest expense, net of interest income in our Unaudited Condensed Consolidated Statements of Income within the next 12 months. We estimate that we will also reclassify $3 million of derivative losses (net of tax) from Accumulated Other Comprehensive Income (Loss) to Other income, net in our Unaudited Condensed Consolidated Statements of Income within the next 12 months; the reclassification of derivative losses to Other income, net offsets the projected impact of the remeasurement of the underlying transactions.
Other Derivative Instruments
We hold other short-term derivative instruments, including foreign currency forward contracts, to manage our exposure to variability related to inventory purchases denominated in a non-functional currency. We have elected not to apply hedge accounting for these transactions, and therefore the contracts are adjusted to fair value through our results of operations as of each balance sheet date, which could result in volatility in our earnings. The notional amount and fair value of these contracts at March 31, 2020 and December 31, 2019, along with the effect on our results of operations during the three months ended March 31, 2020 and 2019, were immaterial.


23



Note 11. Fair Value Measurements
Financial Assets and Liabilities Measured at Fair Value
We use the market and income approaches to estimate the fair value of our financial assets and liabilities, and during the three months ended March 31, 2020, there were no significant changes in valuation techniques or inputs related to the financial assets or liabilities that we have historically recorded at fair value. The tiers in the fair value hierarchy include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation inputs we utilized to determine such fair value as of March 31, 2020 and December 31, 2019 (in thousands):
 
Balance as of March 31, 2020
 
Fair Value Measurements as of March 31, 2020
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Cash surrender value of life insurance
$
50,724

 
$

 
$
50,724

 
$

Cross currency swap agreements
4,789

 

 
4,789

 

Total Assets
$
55,513

 
$

 
$
55,513

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liabilities
$
12,069

 
$

 
$

 
$
12,069

Interest rate swaps
3,241

 

 
3,241

 

Deferred compensation liabilities
56,395

 

 
56,395

 

Cross currency swap agreements
18,292

 

 
18,292

 

Total Liabilities
$
89,997

 
$

 
$
77,928

 
$
12,069

 
Balance as of December 31, 2019
 
Fair Value Measurements as of December 31, 2019
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Cash surrender value of life insurance
$
60,637

 
$

 
$
60,637

 
$

Interest rate swaps
3,262

 

 
3,262

 

Cross currency swap agreements
3,156

 

 
3,156

 

Total Assets
$
67,055

 
$

 
$
67,055

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liabilities
$
11,539

 
$

 
$

 
$
11,539

Deferred compensation liabilities
63,981

 

 
63,981

 

Cross currency swap agreements
24,319

 

 
24,319

 

Total Liabilities
$
99,839

 
$

 
$
88,300

 
$
11,539


The cash surrender value of life insurance is included in Other noncurrent assets on our Unaudited Condensed Consolidated Balance Sheets. The current portion of contingent consideration liabilities is included in Other current liabilities on our Unaudited Condensed Consolidated Balance Sheets; the noncurrent portion of these amounts is included in Other noncurrent liabilities on our Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments. The balance sheet classification of the interest rate swaps and cross currency swap agreements is presented in Note 10, "Derivative Instruments and Hedging Activities."
Our Level 2 assets and liabilities are valued using inputs from third parties and market observable data. We obtain valuation data for the cash surrender value of life insurance and deferred compensation liabilities from third party sources, which determine the net asset values for our accounts using quoted market prices, investment allocations and reportable trades. We value our other derivative instruments using a third party valuation model that performs a discounted cash flow analysis based on the terms of the contracts and market observable inputs such as current and forward interest rates and current and forward foreign exchange rates.
Our contingent consideration liabilities are related to our business acquisitions. Under the terms of the contingent consideration agreements, payments may be made at specified future dates depending on the performance of the acquired

24



business subsequent to the acquisition. The liabilities for these payments are classified as Level 3 liabilities because the related fair value measurement, which is determined using an income approach, includes significant inputs not observable in the market.
Financial Assets and Liabilities Not Measured at Fair Value
Our debt is reflected on the Unaudited Condensed Consolidated Balance Sheets at cost. Based on market conditions as of both March 31, 2020 and December 31, 2019, the fair value of our credit agreement borrowings reasonably approximated the carrying values of $1.9 billion and $1.6 billion, respectively. In addition, based on market conditions, the fair value of the outstanding borrowings under the receivables facility approximated the carrying value of $98 million as of March 31, 2020; as of December 31, 2019, there were no outstanding borrowings under the receivables facility. As of December 31, 2019, the fair value of the U.S. Notes (2023) was approximately $609 million compared to a carrying value of $600 million; as of March 31, 2020, there were no outstanding borrowings on the U.S. Notes (2023). As of March 31, 2020 and December 31, 2019, the fair values of the Euro Notes (2024) were approximately $544 million and $632 million compared to carrying values of $552 million and $561 million, respectively. As of March 31, 2020 and December 31, 2019, the fair values of the Euro Notes (2026/28) were $1.0 billion and $1.2 billion compared to a carrying value of $1.1 billion at each date.
The fair value measurements of the borrowings under our credit agreement and receivables facility are classified as Level 2 within the fair value hierarchy since they are determined based upon significant inputs observable in the market, including interest rates on recent financing transactions with similar terms and maturities. We estimated the fair value by calculating the upfront cash payment a market participant would require at March 31, 2020 and December 31, 2019 to assume these obligations. The fair value of our U.S. Notes (2023) was classified as Level 1 within the fair value hierarchy since it was determined based upon observable market inputs including quoted market prices in an active market. The fair values of our Euro Notes (2024) and Euro Notes (2026/28) are determined based upon observable market inputs including quoted market prices in markets that are not active, and therefore are classified as Level 2 within the fair value hierarchy.

Note 12. Employee Benefit Plans
We have funded and unfunded defined benefit plans covering certain employee groups in the U.S. and various European countries. Local statutory requirements govern many of our European plans. The defined benefit plans are mostly closed to new participants and, in some cases, existing participants no longer accrue benefits. As of March 31, 2020 and December 31, 2019, the aggregate funded status of the defined benefit plans was a liability of $139 million and $142 million, respectively, and is reported in Other noncurrent liabilities and Accrued payroll-related liabilities on our Unaudited Condensed Consolidated Balance Sheets.
On June 28, 2019, we approved an amendment to terminate our primary defined benefit plan in the U.S. (the "U.S. Plan") and to freeze all related benefit accruals, effective June 30, 2019. The distribution of the U.S. Plan assets pursuant to the termination will not be made until the plan termination satisfies all regulatory requirements, which is expected to occur in 2020. U.S. Plan participants will receive their full accrued benefits from plan assets by electing either lump sum distributions or annuity contracts with a qualifying third-party annuity provider. The resulting settlement effect of the U.S. Plan termination will be determined based on prevailing market conditions, the lump sum offer participation rate of eligible participants, the actual lump sum distributions, and annuity purchase rates at the date of distribution. As a result, we are currently unable to reasonably estimate either the timing or the final amount of such settlement charges. Based on the valuation performed as of December 31, 2019, the U.S. Plan had an underfunded status of $8 million.
Net periodic benefit cost for our defined benefit plans included the following components for the three months ended March 31, 2020 and 2019 (in thousands):
 
Three Months Ended
 
March 31,
 
2020
 
2019
Service cost
$
670

 
$
587

Interest cost
718

 
985

Expected return on plan assets
(478
)
 
(780
)
Amortization of actuarial (gain) loss
114

 
253

Net periodic benefit cost
$
1,024

 
$
1,045



25



For the three months ended March 31, 2020 and 2019, the service cost component of net periodic benefit cost was classified in Selling, general and administrative expenses, while the other components of net periodic benefit cost were classified in Other income, net in our Unaudited Condensed Consolidated Statements of Income.

Note 13. Income Taxes
At the end of each interim period, we estimate our annual effective tax rate and apply that rate to our interim earnings. We also record the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and the effects of changes in tax laws or rates, in the interim period in which they occur.
The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in state and foreign jurisdictions, permanent and temporary differences between book and taxable income, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.    
Our effective income tax rate for the three months ended March 31, 2020 was 29.2%, compared to 27.1% for the comparable prior year period. The increase is attributable to a higher expected annual effective tax rate in 2020 as a result of the estimated unfavorable impact of the COVID-19 pandemic on the Company’s results of operations. The primary factor in the increase is the impact of lower available interest deductions in certain foreign jurisdictions due to legislative thin capitalization constraints, typically based on profitability. In the current quarter the effective tax rate was reduced 0.8% by favorable discrete items, primarily excess tax benefits on stock-based compensation and deferred tax adjustments as a result of statutory tax rate changes. Net discrete items in the prior year quarter added 0.1% to the effective tax rate. Ongoing uncertainties due to the impact of the COVID-19 pandemic on the Company’s operations for the remainder of 2020 may result in volatile effective tax rates driven generally by the level of profitability and changes in the mix of earnings across the Company’s jurisdictions.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was enacted in the U.S. to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. Similar legislation was enacted in many of the Company’s international jurisdictions. Tax measures in these legislative actions did not have a material impact on the Company’s results of operations for the three months ended March 31, 2020. As a result of those initiatives, the Company plans to defer the timing of certain income, indirect and payroll tax payments in various jurisdictions, which we currently estimate will result in the deferral of approximately $60 million of 2020 tax payments to 2021 and later.


26



Note 14. Segment and Geographic Information
We have four operating segments: Wholesale – North America, Europe, Specialty and Self Service. Our Wholesale – North America and Self Service operating segments are aggregated into one reportable segment, North America, because they possess similar economic characteristics and have common products and services, customers, and methods of distribution. Our reportable segments are organized based on a combination of geographic areas served and type of product lines offered. The reportable segments are managed separately as each business serves different customers (i.e. geographic in the case of North America and Europe and product type in the case of Specialty) and is affected by different economic conditions. Therefore, we present three reportable segments: North America, Europe and Specialty.
The following tables present our financial performance by reportable segment for the periods indicated (in thousands):
 
North America
 
Europe
 
Specialty
 
Eliminations
 
Consolidated
Three Months Ended March 31, 2020
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Third Party
$
1,289,935


$
1,363,594


$
347,406

 
$

 
$
3,000,935

Intersegment
260

 

 
1,176

 
(1,436
)
 

Total segment revenue
$
1,290,195


$
1,363,594


$
348,582


$
(1,436
)
 
$
3,000,935

Segment EBITDA
$
211,438


$
78,262


$
32,232

 
$

 
$
321,932

Depreciation and amortization (1)
23,148

 
41,095

 
7,136

 

 
71,379

Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Third Party
$
1,302,206

 
$
1,445,541

 
$
352,556

 
$

 
$
3,100,303

Intersegment
103

 

 
1,181

 
(1,284
)
 

Total segment revenue
$
1,302,309

 
$
1,445,541

 
$
353,737

 
$
(1,284
)
 
$
3,100,303

Segment EBITDA
$
176,636

 
$
105,298

 
$
37,959

 
$

 
$
319,893

Depreciation and amortization (1)
22,239

 
47,011

 
6,957

 

 
76,207


(1)
Amounts presented include depreciation and amortization expense recorded within cost of goods sold.
The key measure of segment profit or loss reviewed by our chief operating decision maker, who is our Chief Executive Officer, is Segment EBITDA. Segment EBITDA includes revenue and expenses that are controllable by the segment. Corporate general and administrative expenses are allocated to the segments based on usage, with shared expenses apportioned based on the segment's percentage of consolidated revenue. We calculate Segment EBITDA as EBITDA excluding restructuring and acquisition related expenses (which includes restructuring expenses recorded in Cost of goods sold), change in fair value of contingent consideration liabilities, other gains and losses related to acquisitions, equity method investments, or divestitures, equity in losses and earnings of unconsolidated subsidiaries, and impairment charges. EBITDA, which is the basis for Segment EBITDA, is calculated as net income, less net income (loss) attributable to continuing and discontinued noncontrolling interest, excluding discontinued operations and discontinued noncontrolling interest, depreciation, amortization, interest (which includes gains and losses on debt extinguishment) and income tax expense.