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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
x 	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the fiscal year ended December 31, 2008
OR
 
¨ 	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
Commission File No. 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 Number)	
		
120 North LaSalle Street
Suite 3300
Chicago, Illinois	 	60602	
(Address of principal executive offices)	 	(Zip Code)	
Registrant’s telephone number, including area code: (312) 621-1950
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	 	Name of each exchange on which registered	
Common Stock, par value $.01 per share	 	Nasdaq Global Select Market	
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   x     No   ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes   ¨     No   x
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   x     No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   x	 	Accelerated filer   ¨	
Non-accelerated filer   ¨	 	Smaller reporting company   ¨	
(Do not check if a smaller reporting company)	 		
Indicate by check mark whether the registrant is a shell company (as described in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
As of June 30, 2008, there were 127,180,454 shares of common stock outstanding held by stockholders who were not affiliates (as defined by regulations of the Securities and Exchange Commission) of the registrant, and the aggregate market value of such shares was approximately $2.3 billion (based on the closing sale price on the Nasdaq Global Select Market on June 30, 2008). The number of outstanding shares of the registrant’s common stock as of February 20, 2009 was 139,932,910.
Documents Incorporated by Reference
Those sections or portions of the registrant’s proxy statement for the Annual Meeting of Stockholders to be held on May 4, 2009, described in Part III hereof, are incorporated by reference in this report.

 

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PART I
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements. Words such as “may,” “will,” “plan,” “should,” “expect,” “anticipate,” “believe,” “if,” “estimate,” “intend,” “project” and similar words or expressions are used to identify these forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. However, these forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause our actual results, performance or achievements to be materially different. These factors include, among other things:
 
 	•	 	uncertainty as to changes in U.S. general economic activity and the impact of these changes on the demand for our products and our ability to obtain financing for operations;	
 
 	•	 	fluctuations in the pricing of new OEM replacement parts;	
 
 	•	 	the availability and cost of our inventory;	
 
 	•	 	variations in vehicle accident rates;	
 
 	•	 	changes in state or federal laws or regulations affecting our business;	
 
 	•	 	changes in the types of replacements parts that insurance carriers will accept in the repair process;	
 
 	•	 	changes in the demand for our products and the supply of our inventory due to severity of weather and seasonality of weather patterns;	
 
 	•	 	the amount and timing of operating costs and capital expenditures relating to the maintenance and expansion of our business, operations and infrastructure;	
 
 	•	 	increasing competition in the automotive parts industry;	
 
 	•	 	our ability to increase or maintain revenue and profitability at our facilities;	
 
 	•	 	uncertainty as to our future profitability on a consolidated basis;	
 
 	•	 	uncertainty as to the impact on our industry of any terrorist attacks or responses to terrorist attacks;	
 
 	•	 	our ability to operate within the limitations imposed by financing arrangements;	
 
 	•	 	our ability to obtain financing on acceptable terms to finance our growth;	
 
 	•	 	declines in the values of our assets;	
 
 	•	 	fluctuations in fuel and other commodity prices;	
 
 	•	 	fluctuations in the prices of scrap metal and other metals;	
 
 	•	 	our ability to develop and implement the operational and financial systems needed to manage our operations;	
 
 	•	 	our ability to integrate and successfully operate acquired companies and any companies acquired in the future and the risks associated with these companies;	
 
 	•	 	the risk that Keystone’s business will not be integrated successfully or that we will incur unanticipated costs of integration;	
 
 	•	 	claims by original equipment manufacturers that attempt to restrict or eliminate the sale of aftermarket products; and	
 
 	•	 	decreases in the supply of end of life and crush only vehicles that we process and sell for scrap.	
Other matters set forth in this Annual Report may also cause our actual future results to differ materially from these forward-looking statements. We cannot assure you that our expectations will prove to be correct. In
 
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addition, all subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements mentioned above. You should not place undue reliance on these forward-looking statements. All of these forward-looking statements are based on our expectations as of the date of this Annual Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website (www.lkqcorp.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the SEC.
 
ITEM 1.	BUSINESS	
Overview
We provide replacement systems, components, and parts needed to repair vehicles (cars and trucks). Buyers of vehicle replacement products have the option to purchase from primarily four sources: new products produced by original equipment manufacturers (“OEMs”), which are commonly known as OEM products; new products produced by companies other than the OEMs, which are sometimes referred to as “aftermarket” products; recycled products originally produced by OEMs, which we refer to as recycled OEM products; and used products that have been refurbished. We participate in the market for recycled OEM products as well as the market for collision repair aftermarket products. We obtain aftermarket products and salvage vehicles from a variety of sources, and we dismantle the salvage vehicles to obtain a comprehensive range of vehicle products that we distribute into the vehicle repair market. We also refurbish bumpers, wheels, head lamps and tail lamps.
In addition, we operate self-service facilities that sell retail recycled automotive products. Retail customers are given access to salvage vehicles and allowed to remove the parts they desire to purchase. In 2008, we acquired a company with multiple self-service facilities in the state of California and three companies in the heavy-duty truck recycled parts business. The heavy-duty truck acquisitions represent an expansion of our business into an area that we believe is complementary to our existing business.
We believe that our business is environmentally responsible. Our recycled automotive products provide an alternative to the manufacture of new products, which would require the expenditure of significantly more resources and energy and would generate a substantial amount of additional pollution. Also, we recycle materials, such as fuel, motor oil, and Freon, from the salvage vehicles that we procure. In addition, we save landfill space because the parts that we recycle would otherwise be discarded.
We are the largest nationwide provider of recycled OEM products and related services, with sales, processing, and distribution facilities that reach most major markets in the U.S. In October 2007, we acquired Keystone Automotive Industries, Inc., the nation’s leading distributor of aftermarket collision replacement products. As a result, we are the largest nationwide provider of aftermarket collision replacement products and refurbished bumper covers and wheels.
We procure salvage vehicles, primarily at auctions, using our locally based professionals, proprietary processes, and a disciplined procurement system. In addition, as an alternative source of salvage vehicles, we obtain some inventory directly from insurance companies, vehicle manufacturers, and other suppliers. Once we have received proper title, which serves as a safeguard that the vehicles have not been stolen, we dismantle such vehicles for recycled OEM products. We purchase aftermarket products from manufacturers, primarily in Taiwan, using proprietary order management systems.
Our customers include collision and mechanical repair shops and, indirectly, insurance companies, including extended warranty companies. The majority of our products and services are sold to collision repair
 
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shops, also known as body shops, and mechanical repair shops. We indirectly rely on insurance companies, which ultimately pay the collision repair shops for the repair of insured vehicles, as a source of business. These insurance companies exert significant influence in the vehicle repair decision, and we provide a nationwide source for consistency, quality, and availability of replacement products. Because of their importance to the process, we have formed business relationships with certain insurance companies and with certain extended warranty providers, in order to be their preferred vehicle alternative parts supplier. For example, with some insurance companies we have vehicle repair order estimate review programs in place and provide their claims adjusters a part quote and locator service. In addition, we provide them an outlet to dispose of certain total loss vehicles directly to us. We provide extended warranty companies a single national call desk to service their nationwide needs for mechanical products.
We believe we provide customers a value proposition that includes high quality products, extensive product availability due to our regional inventory trading zones, product costs lower than new OEM products, and quick delivery. We provide benefits to repair shops and insurance companies because the lower costs for our products enable many vehicles to be repaired rather than declared a total loss. By expanding our product offerings to include recycled OEM products, aftermarket products, and refurbished bumpers, wheels and head and tail lamps, we now offer customers an extensive range of vehicle replacement products. We believe this unique combination of recycled, aftermarket and refurbished products allows us to serve as a “one-stop” solution for our customers looking for the most cost advantageous way to repair vehicles.
Our History
We believe we were the first recycler of light vehicle products to achieve a national network and presence. Since our formation in 1998, we have grown through both internal development and acquisitions. Our acquisition strategy has been to target companies with strategic locations and significant market presence, strong management teams, a record of environmental compliance, solid growth prospects, and a reputation for quality and customer service.
In February 2004, we expanded our product offerings by acquiring a supplier of aftermarket products and a provider of self-service retail recycled vehicle products. In January 2006, we acquired an aluminum alloy wheel refurbishing business. In January 2007, we acquired a head and tail lamp refurbishing company. In October 2007, we significantly increased our size by acquiring Keystone Automotive Industries, Inc. At the time of the acquisition, Keystone was the leading distributor of aftermarket collision replacement parts. Keystone also refurbished alloy wheels, which added to our existing wheel business. The Keystone acquisition also expanded our product offerings with refurbished bumpers and paint and other materials used in the repair of damaged vehicles. In March 2008, we acquired our first heavy-duty truck recycled parts business.
Our Strengths
We Provide a National Solution to Insurance Companies and Extended Warranty Providers.
We believe that our nationwide presence gives us a unique ability to service the major automobile insurance companies and extended warranty providers. Insurance companies and extended warranty providers operate generally at a national or regional level and play a critical role in the repair process. We believe we provide a direct benefit to these companies by lowering the cost of repairs, decreasing the time required to return the repaired vehicle to the customer, and providing a replacement product that is of comparable quality to the part replaced. Specifically, we assist insurance companies by purchasing insured total loss vehicles and by providing cost effective products through sales to collision repair shops, especially to repair shops that are part of an insurance company network. We also provide a review of vehicle repair order estimates to insurance companies so they may assess the opportunity to increase usage of recycled OEM, aftermarket, and refurbished products. For extended warranty providers, we provide a single national call desk to service their nationwide need for mechanical products.
 
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We Believe We Have the Only National Network for Alternative Automotive Replacement Products and it Would be Difficult to Replicate.
We have invested significant capital developing a national network of recycled OEM, aftermarket and refurbished product facilities that serves most major metropolitan areas in the U.S. We have differentiated ourselves from our local competitors and made replication of our network difficult by developing our network through purchasing anchor companies that were among the largest companies in the industry. The difficulty and time required to obtain proper zoning, as well as dismantling and other environmental permits necessary to operate newly-sited recycled OEM facilities, would make establishing such new facilities challenging. In addition, there are difficulties associated with recruiting and hiring an experienced management team that has strong industry knowledge and local relationships with customers. Finally, our national network allows us to enter new adjacent markets quickly by establishing redistribution facilities, which avoids the need for local dismantling capabilities and inventory.
We Benefit From a Local Presence.
Our network of facilities allows us to develop and maintain our relationships with local repair shops, while providing a level of service to insurance companies and national customers that is made possible by our nationwide presence. Our local presence allows us to provide daily deliveries that our customers require, using drivers who routinely deliver to the same customers. Our sales force and local delivery drivers develop and maintain critical personal relationships with the local repair shops that benefit from access to our wide selection of products, which we are able to offer as a result of our regional inventory network.
We Have a Proven and Effective Procurement Process.
We use information systems and methodologies designed to enable us to procure salvage vehicles and aftermarket products cost-effectively. As our largest single expenditure, efficient procurement of salvage vehicles and aftermarket products is critical to the growth, operating results and cash flow of our business. Our processes and know-how allow us to identify and value the parts that can be recycled on a damaged vehicle at auction and to determine rapidly the maximum price we will pay for the vehicle in order to achieve our target margins on resale of the recycled OEM products. We carefully analyze the market and obtain aftermarket products and salvage vehicles of the type whose parts are in demand at prices that we believe will allow us to sell products profitably. We have also taken advantage of our relationships with insurance companies and vehicle manufacturers to obtain salvage vehicles outside the auction process.
We Have a Broad and Deep Inventory of Products.
We believe that our customers place a high value on availability of a broad range of vehicle replacement products. We also believe that our inventory of recycled OEM, aftermarket and refurbished products allows us to fill a higher percentage of our customers’ orders than our competitors. In addition, our ability to share inventory on a regional basis increases the availability of replacement products and also helps us to fill a higher percentage of our customers’ orders. We have developed regional trading zones within which we make our inventory available to our local facilities, mostly via overnight product transfers. We manage our inventory and purchasing on a regional basis to enhance the availability of the products that we believe will be in the highest demand within each region. Our broad and deep inventory furthers our ability to serve as a “one-stop” solution for our customers’ recycled OEM, aftermarket and refurbished product needs.
We Have Implemented Management Disciplines.
Our management and operations team is highly experienced, with many managers having spent their entire careers in the vehicle replacement parts industry. We have developed and built procurement, operating, and
 
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financial systems that have allowed us to grow and develop our national network and implement professional management techniques and disciplines. As our business has grown, we have acquired additional management talent that has furthered the sharing of best practices throughout the company. In addition, our senior management team has extensive acquisition experience and will continue to use our disciplined approach in targeting growth opportunities.
Our Strategies
Strengthen our North American Network Through Internal Growth and Acquisitions.
We intend to continue to expand our market coverage through a combination of internal development and acquisitions and to look for opportunities to expand into new regions and into adjacent markets. We plan to establish a presence in additional metropolitan markets and a number of smaller markets in North America. We have applied an analytical and disciplined approach to our acquisition process and have targeted companies with strong management teams, a record of environmental compliance, solid growth prospects, and a reputation for quality and customer service. We have also expanded our product offerings and will continue to consider additional opportunities to expand our product offerings.
Further Develop Business Relationships.
We intend to continue to develop business relationships with automobile insurance companies, extended warranty providers, and other industry participants. We believe that insurance companies and extended warranty providers, as payors for many repairs, will take a more active role in the selection of replacement products in the repair process in order to use lower cost alternatives to new OEM products. On behalf of certain insurance company customers, we provide a review of vehicle repair order estimates so they may assess the opportunity to increase usage of recycled OEM, aftermarket and refurbished products in the repair process, thereby reducing their costs. Our employees also provide quotes for our products to assist several insurance companies with their estimate and settlement processes. We also work with insurance companies and vehicle manufacturers to procure salvage vehicles directly from them on a selected basis, which provides us an additional source of supply and provides them improved economics on salvage vehicle sales. We believe we are positioned to take advantage of the increasing importance of these industry participants and will continue to look for ways to enhance our relationships.
Continue to Improve our Operating Results.
We are working to improve our operating results by applying our business disciplines to our most recently acquired facilities, continuing to build our network, further centralizing certain functions, improving our use of technology, and increasing revenue at our lower volume facilities. Our higher volume facilities generally operate at a higher profitability level as a percentage of revenue. We believe we can improve the profitability level at our lower volume facilities by achieving the higher volumes and improved economies of scale that we realize at our higher volume facilities. We intend to continue to refine our procurement system, which uses methodologies that analyze demand levels for our products, existing inventory levels, and projected margins.
Further Develop our Technology and Business Processes.
We continue to emphasize the use of technology in our processes to improve efficiency and to increase the standardization of our business. We continue to develop our technology to allow us to better manage and analyze our inventory, to assist our salespeople with up-to-date pricing and availability of our products, and to further enhance our procurement process. For example, many of our representatives responsible for procuring vehicles, whom we refer to as “scouts,” are equipped with handheld computing devices to assist them in appraising the vehicles prior to submitting a bid to purchase the vehicle.
 
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Raise Industry Standards by Being the Industry Leader.
Since our inception, we have employed a professional approach to the vehicle recycling business and have applied the same approach to our aftermarket and refurbishing businesses. Our leadership position in the collision repair aftermarket industry was further enhanced with our acquisition of Keystone, which was the largest provider of collision repair aftermarket products. We continue to seek new ways to improve our methodologies and to communicate our standards to our customers. We believe that, by elevating industry standards in areas such as customer service, integrity, product quality and availability, delivery time, warranty support, environmental compliance, and appearance of facilities, we can help promote the acceptability of the use of recycled OEM, aftermarket and refurbished products.
Our Process
Our operations generally involve the procurement of inventory, vehicle processing (in the case of recycled OEM products), sales, and distribution. We also perform refurbishing of OEM wheels, bumpers, head lamps and tail lamps. Such refurbishing work is primarily cosmetic.
Procurement of Inventory
We start the process of procuring recycled OEM products for our wholesale operations by acquiring severely damaged or totaled vehicles. We acquired approximately 144,500 salvage vehicles for our wholesale operations in 2008. We purchase the majority of our vehicles for our wholesale operations from salvage auctions. Wrecked vehicles are sold at salvage auctions held each weekday throughout the country. Salvage auctions provide an outlet for salvage vehicles to be processed and sold primarily to automotive recyclers and rebuilders. We pay third parties fees to tow the vehicles from the auction to our facilities. Salvage auctions charge fees both to the supplier of vehicles (primarily insurance companies) and to the purchaser (including us).
For the vast majority of our salvage auction purchases, we send a scout in advance of each auction to investigate the vehicles we would be interested in buying. The scout obtains key information such as the model, mileage, and damage assessment and determines which parts on the targeted vehicles are recyclable. This information is electronically forwarded to our bid specialists via handheld computing devices or facsimile transmissions. The bid specialists analyze the data in light of current demand for the parts in question, the levels of our inventory with respect to such parts, and the projected margins expected for each vehicle. The specialists then set a maximum bid price that our bidders use to purchase the vehicle at auction. We believe that this system provides a disciplined approach to procurement.
We also obtain salvage vehicles and parts from insurance companies, vehicle manufacturers, abandoned vehicle programs, and other salvage sources. Some of these arrangements allow us to acquire salvage vehicles directly from the insurance company or vehicle manufacturer at a cost calculated as a percentage of revenue, which is remitted as products are sold from these vehicles. These arrangements eliminate the fees we and the insurance company would otherwise pay to the salvage auction and provide us inventory with a lower initial expenditure of capital.
We acquire inventory for our self-service recycled OEM products operations from a variety of sources, including but not limited to auctions, towing companies, municipalities, insurance carriers, charitable organizations and the general public. In 2008, we purchased approximately 297,000 lower cost self-service and crush only vehicles.
We purchase aftermarket products from independent manufacturers primarily in Taiwan and the United States. We purchased and imported approximately 38% of our aftermarket products directly from manufacturers in Taiwan and other Asian countries. Approximately 62% of our aftermarket products have been purchased from locations in the United States. However, we believe that the majority of these products are manufactured in
 
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Taiwan and other Asian countries. No single supplier currently provides more than 21% of our aftermarket products. We use proprietary order management systems to procure our aftermarket inventory. The systems initiate inventory purchases based on stocking levels and historical sales data. We believe that the systems help us to procure our aftermarket inventory efficiently and to maintain one of the highest fulfillment rates in the aftermarket products industry.
Vehicle Processing
Vehicle processing for our wholesale operations involves dismantling a salvage vehicle into recycled OEM products ready for delivery. When a salvage vehicle arrives at one of our facilities, an inventory specialist identifies, catalogs, and schedules the vehicle for dismantling. We do not dismantle the vehicle until we have received proper title documentation, which serves as a safeguard that the vehicle was not stolen.
The dismantler removes components that will become products for sale. Products that are placed directly on inventory shelves generally include such items as the engine, transmission, hood, trunk lid, head and tail lamp assemblies, rear bumper, and doors. We remove all recyclable items including fluids, Freon, batteries, tires, and catalytic converters. These items are sold to recyclers and reprocessors. Dismantlers also perform any required cutting of the vehicle frame or body.
Each inventory item is entered into our inventory tracking system, inspected for quality, tagged for identification, and prepared for storage and delivery to our customers. Mechanical products not in a condition to be sold as recycled products or that are in surplus supply are separated and sold in bulk to parts remanufacturers, while the wheel, bumper and lighting items are sent to our refurbishing facilities. The remaining vehicle hulks and components, such as fabrics, rubber, plastics, and glass, are sold to scrap processors.
The processing of vehicles for our self-service recycled OEM products operations involves removal of all recyclable items including the fluids, Freon, batteries, and catalytic converters. The vehicles are then moved to a site on our retail lots and made available for customers to remove parts.
Refurbishing Process
We refurbish both chrome plated bumpers and plastic bumper covers. The refurbishing process for chrome plated bumpers generally includes some or all of the following steps: straightening or reforming to original dimensions; welding breaks or cracks; surface grinding to remove rust or corrosion; chemical stripping to remove the original electroplated finishes; metal polishing and buffing; electroplating layers of copper, or nickel and chromium; and inspecting and packaging.
The refurbishing process for plastic bumper covers generally includes some or all of the following steps: straightening or reforming to original dimensions with heat; sanding or sandblasting the surface; using plastic welding techniques when necessary; finishing the surface with various epoxies and similar materials; painting; texturing and color coating as needed; and inspecting and packaging.
We refurbish steel and alloy wheels. The refurbishing process for wheels generally includes some or all of the following steps: straightening; welding minor dents or chips; hand-detailing; painting; machining; applying a clear powder coat; and inspecting and packaging.
We refurbish head and tail lamps. The refurbishing process for lamps includes: a proprietary method of repairing the housing; sanding and buffing to remove imperfections; cleaning the lamp; re-coating the lens with a UV protectant coat; reassembling; and inspecting and packaging.
 
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Our refurbished products are processed from cores obtained from our recycled OEM locations, from customers and from brokers. The higher quality cores are then refurbished. For popular wheels, we also purchase aftermarket wheels from outside vendors to fill demand.
Sales
As of December 31, 2008, we employed 620 full-time sales staff in our wholesale recycled OEM products operations. Of these, 571 were located at sales desks at our facilities and generally are responsible for accepting incoming calls from, and selling our inventory to, our customers. We put all of our sales personnel through a thorough training program. Most of our sales personnel are paid primarily on a commission basis. In addition, as of December 31, 2008, we had approximately 49 traveling sales staff who visit our customers and focus on business development in various markets.
In our aftermarket products operations, sales orders are accepted either by our aftermarket and refurbished products sales personnel at our sales call centers or by our route sales persons. As of December 31, 2008, we had approximately 589 employees selling aftermarket and refurbished products at such call centers and approximately 1,366 route sales persons selling aftermarket and refurbished products to the customers they visit.
As part of the integration of Keystone into our preexisting operations, we initiated a program to encourage cross selling of aftermarket and recycled OEM products to our customers. In late 2008, we provided access to Keystone’s point of sales system to our recycled OEM products sales staff. We have also created better links for Keystone’s sales staff to refer customers to our recycled OEM products sales staff. Frequently, when recycled OEM parts are unavailable or out of stock, we are able to fill the order with aftermarket parts from Keystone’s inventory.
We are continually reviewing and revising the pricing of our recycled OEM products. Our pricing specialists take into consideration factors such as location, recent demand, inventory quantity, inventory turnover, new OEM product prices, recycled OEM product prices, aftermarket and refurbished product prices, and remanufactured part prices, with the goal of optimizing revenue. We update the pricing of our aftermarket and refurbished products at least annually when we update our product catalogs or when standard pricing guides are provided to estimating systems. We may adjust prices during the year in response to material price changes of OEM products.
The inventory base of each of our facilities, supplemented by the inventory sharing system within our regional trading zones, gives us what we believe to be a competitive advantage through our ability to meet our customers’ requirements more frequently than smaller competitors.
Distribution
Each sale results in the generation of a work order. A dispatcher is then responsible for ensuring product accuracy, printing the final invoice, and including the products on the appropriate truck route for delivery to the customer. We operate a delivery fleet of medium-sized trucks and smaller trucks and vans. These trucks deliver products to our customers within a specified territory, typically on a daily basis. In markets where we offer recycled OEM, aftermarket and refurbished products, we often deliver more than one product type on the same delivery routes to help minimize distribution costs.
Additionally, we have developed an internal distribution network to allow our sales representatives to sell recycled OEM, aftermarket and refurbished products from the inventory of nearby facilities within our regional trading zones, thus improving our ability to fulfill customer requests and accelerating inventory turnover. Each weekday we operate approximately 245 transfer runs between our facilities generally within our trading zones that carry recycled OEM, aftermarket and refurbished products. In addition, we have approximately 2,400 local delivery routes serving our customers each weekday.
 
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Our Products
When we procure salvage vehicles for our wholesale operations, we focus on vehicles for which the insured repair market has the most recycled OEM product demand. These tend to be popular types of vehicles such as sport utility vehicles and pickup trucks, and automobile models with high sales volume. These vehicles generally are a few model years old, as insurers tend to use new OEM products on repairs of vehicles that are one to two years old. Similarly, insurers are less likely to authorize the repair of vehicles more than ten model years old. The degree of damage is not a significant factor in our process as we assign value only to the undamaged products when we prepare our bids.
Our most popular recycled OEM products include engines, transmissions, vehicle front end assemblies, doors, trunk lids, bumper assemblies, wheels, head and tail lamp assemblies, mirrors, fenders, and axles.
We typically procure salvage vehicles that are more than seven model years old for our self-service retail recycled products operations. These vehicles are placed in our self-service yards where retail customers pay a fee for entry. The customers remove parts from the vehicles and pay us for the parts they desire to purchase.
When we obtain a mechanical product, wheels, bumpers or certain lighting products from a dismantled vehicle and determine that we have an excess supply of such product or it is defective, the mechanical item is then sold in bulk to mechanical remanufacturers, while the wheel, bumper and lighting items are sent to our refurbishing locations. We refer to these items as core products. The majority of the mechanical products are transferred to our core facility in Houston, Texas where we sort them by product and model type. Examples of such products are engine blocks and heads, transmissions, starters, alternators, and air conditioner compressors.
When we procure aftermarket products and decide which wheels, bumpers and lights to refurbish, we focus on products that are in the most demand by the insured repair market. Our most popular aftermarket products are head lamps, tail lamps, grilles, hoods, mirrors, bumpers, bumper covers, and fenders. We offer paint and related repair materials (like tape, sandpaper, paint guns and frame racks) so that our customers can purchase these products and the alternative automotive repair parts from a single source.
In 1987, the Certified Automotive Parts Association (“CAPA”) was founded to provide insurance companies, distributors, collision repair shops and consumers with an objective method of evaluating the functional equivalence of aftermarket collision replacement products and OEM collision replacement products. CAPA, a non-profit association of insurance companies, manufacturers, importers, distributors, collision repair shops and consumer groups, establishes the specifications for, tests, and certifies the quality of, aftermarket collision replacement products. Through independent testing laboratories, CAPA develops engineering specifications for aftermarket collision replacement products based upon an examination of OEM parts; certifies the factories, manufacturing processes and quality control procedures used by independent manufacturers; and certifies the materials, fit and finish of specific aftermarket collision replacement products. Many major insurance companies have adopted policies recommending or requiring the use of parts certified by CAPA, when available. We distribute parts certified by CAPA when available and actively participate with CAPA, insurance companies and consumer groups in encouraging independent manufacturers of collision replacement products to seek CAPA certification.
Our wholesale and self-service operations generate scrap metal and other metals that we sell. After we dismantle a salvage vehicle for wholesale parts and after vehicles have been used in our self-service business, the remaining vehicle hulks are sold to scrap processors and other metals are sold to processors and brokers of metal. In addition, we receive “crush only” vehicles from other companies, including OEMs, which we dismantle and that generate scrap and other metals.
 
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Our Customers
Insurance Companies
We consider automobile insurance companies our customers, as they are a key demand driver for our products. Our products are delivered directly to the repair shop or installer, because insurance companies and extended warranty providers generally do not take receipt of repair parts. While insurance companies do not pay for our products directly, the insurance company does ultimately pay for the repair costs of the insured vehicle in excess of any deductible amount. As a result, the insurance company often exerts significant influence in the decision-making process as to how a damaged vehicle is repaired, and the cost level of the product used in the repair process. Insurance companies are also concerned with customer satisfaction with the repair process and the total time to return the repaired vehicle to its owner.
Repair Shops and Others
We sell the majority of our products wholesale to collision repair shops and mechanical repair shops. The majority of these customers tend to be individually-owned small businesses, although there has been a trend toward consolidation resulting in the formation of several national and regional repair companies. We also sell our products to automobile dealerships and fleet management groups. In addition, we sell our products to individual retail customers at our self-service retail locations and at certain of our wholesale recycled OEM, aftermarket and refurbished product locations.
Remanufacturers
A mechanical part that is not suitable for sale as a replacement part, or that is a product for which we have an excess supply, is sold to mechanical remanufacturers in bulk shipments. Examples of mechanical parts we sell in this manner are engine blocks and heads, transmissions, starters, alternators, and air conditioner compressors. Remanufacturers usually are significantly larger companies than repair shops. Our sales to them tend to be large orders and are dependent on their needs for a certain product line.
Our Employees
As of December 31, 2008, we had approximately 9,600 employees. In July 2006, approximately 60 of our employees at our Totowa, New Jersey facility voted to be represented by a union. We signed a collective bargaining agreement with the union in July 2007. Approximately 200 of our employees at our bumper refurbishing plant in Mexico and approximately 130 of our employees at our recycled OEM parts facility in Quebec City, Canada are also represented by unions. Other than these locations, none of our employees is a member of a union or participates in other collective bargaining arrangements.
Our Facilities
Our corporate headquarters are located at 120 North LaSalle Street, Suite 3300, Chicago, Illinois 60602. The lease for our corporate headquarters expires in July 2011. We also have regional offices throughout the United States, all of which perform corporate functions. The primary functions performed at our corporate offices are financial, accounting, treasury, marketing, business development, human resources, information systems support, and legal. In addition to our corporate offices, we have numerous operating facilities that handle recycled OEM, aftermarket, refurbished, and self-service retail products. We operate out of a total of approximately 280 physical locations. A majority of these locations are leased. Some of our locations stock multiple product types. Thus, some of our facilities may be described under more than one category below.
Recycled OEM Parts
Our wholesale recycled OEM parts facilities are located among nine geographic regions. A typical facility has processing, sales and distribution operations, including a large warehouse with multiple bays to dismantle
 
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vehicles, indoor and outdoor storage areas, and administrative and sales offices. Equipment typically used at each facility includes hydraulic lifts, forklifts and loaders, and hand tools to dismantle vehicles. We also have facilities that operate primarily as redistribution centers. As of December 31, 2008, we conducted our wholesale recycled OEM parts operations from 73 facilities, 57 of which include a combination of processing, sales and redistribution operations, and 16 of which are primarily redistribution facilities. We also have five recycled OEM parts facilities in Central America. Further, we have three heavy-duty truck operations, one core processing facility and one aluminum smelter.
Aftermarket Parts
We conduct our aftermarket parts business from facilities that serve as sales, warehousing or distribution centers for these parts. As of December 31, 2008, we conducted our aftermarket parts operations from 152 facilities in the United States and Canada.
Refurbished Parts
We refurbish bumpers and wheels at 54 locations in the United States and Canada and one location in northeast Mexico. We refurbish head lamps and tail lamps primarily at a facility in Grand Rapids, Michigan.
Self-Service Retail Parts
Our self-service retail parts facilities typically consist of several acres of vehicles stored outdoors and a retail building through which customers access the vehicles. As of December 31, 2008, we conducted our self-service retail parts operations from 38 facilities in North America.
Competition
We operate in a highly competitive industry. We consider all suppliers of vehicle products to be competitors, including other recycled OEM businesses, OEMs, parts remanufacturers, suppliers of aftermarket and refurbished products, and internet-based suppliers. We believe the principal areas of competition in our industry include availability of inventory, pricing, product quality, and service.
We compete with more than 6,000 domestic vehicle product recyclers, most of which are single-unit operators. We believe most of the vehicle parts recyclers in the U.S. have less than $3.0 million in annual revenue. In some markets, smaller competitors have organized affiliations to share marketing and distribution resources. Greenleaf LLC, which is owned by Schnitzer Steel Industries Inc., is our largest competitor in the light vehicle OEM product recycling business. Schnitzer has operations in the steel manufacturing, metals recycling, and vehicle product recycling businesses and also is a significant operator in the self-service retail recycling business.
We also compete with distributors of aftermarket and refurbished collision light vehicle products. The distribution of aftermarket collision parts is highly fragmented and our competitors, other than OEMs, generally are independently owned distributors having from one to three distribution centers.
Manufacturers of new original equipment parts sell the majority of light vehicle replacement products. We believe, however, that as the insurance and repair industries come to appreciate the advantages of recycled OEM, aftermarket and refurbished products, those products can account for a larger percentage of total vehicle replacement product sales.
Information Technology
We use a single third party facility management system in most of our wholesale recycled OEM operations. We believe that a single system helps us with the continued implementation of standard operating procedures,
 
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training efficiency, employee transferability, access to a national inventory database, management reporting, and data storage. It also eliminates the need to create multiple versions of proprietary applications and systems support processes.
The major features of our facility management systems include inventory control, customer selling and billing, sales analysis, vehicle tracking, and profitability reporting. The systems also support an electronic exchange system for identifying and locating parts at other selected recyclers and facilitates brokered sales to fill customer orders for items not in stock.
We have separate third party providers for our financial systems such as financial and budget reporting, general ledger accounting, accounts payable, payroll, and fixed assets. We intend to implement a common financial reporting system throughout our organization.
We currently protect our local customer, inventory, and corporate consolidated data, such as financial information, e-mail files, and other user files, with daily backups. These backups are stored off site with a third party data protection vendor.
We have consolidated our facility management systems onto regional system platforms. The hardware for all such platforms is located at a single data center. The center is in a secure environment with around-the-clock monitoring; redundant power backup; and multiple, diverse data and telecommunication routing. Facility management system data is “mirrored” (replicated) off site in real time to a disaster recovery facility located in a different part of the country. This disaster recovery facility is also housed in a secure environment with around-the-clock monitoring; redundant power backup; and multiple, diverse data and telecommunications routing.
We use a single third party facility management system in most of our aftermarket operations. We expect to convert the remaining few locations that use a separate system in 2009. Additional third party software packages have been implemented to leverage the centralized data and information that a single system provides, such as a data warehouse to conduct enhanced analytics and reporting, an integrated budgeting system, an electronic data interchange tool, and eCommerce tools to enhance our online business-to-business initiatives, OrderKeystone.com and Keyless.
Our critical aftermarket management systems are housed at a third-party, off site data center that is fully redundant across its infrastructure to ensure that operations are continuously maintained. The data center is secure and monitored 24 hours a day throughout the year by skilled technical staff. Systems are backed up daily and stored off site with a third party storage and archiving company.
We use a single facility management system in most of our refurbishing operations. We are evaluating the options to standardize the facility management systems relating to our heavy-duty truck and self-service operations.
We continually evaluate our systems with the goal of ensuring that all critical systems remain scalable and operational as we continue to grow.
Regulation
Environmental Compliance
Our operations and properties, including the maintenance of our delivery vehicles, are subject to extensive federal, state, and local environmental protection and health and safety laws and regulations. These environmental laws govern, among other things, the emission and discharge of hazardous materials into the ground, air, or water; exposure to hazardous materials; and the generation, handling, storage, use, treatment,
 
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identification, transportation, and disposal of industrial by-products, waste water, storm water, and mercury and other hazardous materials.
We have made and will continue to make capital and other expenditures relating to environmental matters. We have an environmental management process designed to facilitate and support our compliance with these requirements. We cannot assure you, however, that we will at all times be in complete compliance with such requirements.
Although we presently do not expect to incur any capital or other expenditures relating to environmental controls or other environmental matters in amounts that would be material to us, we may be required to make such expenditures in the future. Environmental laws are complex, change frequently and have tended to become more stringent over time. Accordingly, we cannot assure you that environmental laws will not change or become more stringent in the future in a manner that could have a material adverse effect on our business.
Contamination resulting from vehicle recycling processes can include soil and ground water contamination from the release, storage, transportation, or disposal of gasoline, motor oil, antifreeze, transmission fluid, CFCs from air conditioners, other hazardous materials, or metals such as aluminum, cadmium, chromium, lead, and mercury. Contamination from the refurbishment of chrome plated bumpers can occur from the release of the plating material. Contamination can migrate on-site or off-site which can increase the risk, and the amount, of any potential liability.
In addition, many of our facilities are located on or near properties with a history of industrial use that may have involved hazardous materials. As a result, some of our properties may be contaminated. Some environmental laws hold current or previous owners or operators of real property liable for the costs of cleaning up contamination, even if these owners or operators did not know of and were not responsible for such contamination. These environmental laws also impose liability on any person who disposes of, treats, or arranges for the disposal or treatment of hazardous substances, regardless of whether the affected site is owned or operated by such person, and at times can impose liability on companies deemed under law to be a successor to such person. Third parties may also make claims against owners or operators of properties, or successors to such owners or operators, for personal injuries and property damage associated with releases of hazardous or toxic substances.
When we identify a potential material environmental issue during our acquisition due diligence process, we analyze the risks, and, when appropriate, perform further environmental assessment to verify and quantify the extent of the potential contamination. Furthermore, where appropriate, we have established financial reserves for certain environmental matters. In addition, at times we, or sellers from whom we purchased a business, have undertaken remediation projects. We do not anticipate, based on currently available information and current laws, that we will incur liabilities in excess of reserves to address environmental matters. However, in the event we discover new information or if laws change, we may incur significant liabilities, which may exceed our reserves.
Title Laws
In some states, when a vehicle is deemed a total loss, a salvage title is issued. Whether states issue salvage titles is important to the supply of inventory for the vehicle recycling industry because an increase in vehicles that qualify as salvage vehicles provides greater availability and typically lowers the price of such vehicles. Currently, these titling issues are a matter of state law. In 1992, the U.S. Congress commissioned an advisory committee to study problems relating to vehicle titling, registration, and salvage. Since then, legislation has been introduced seeking to establish national uniform requirements in this area, including a uniform definition of a salvage vehicle. The vehicle recycling industry will generally favor a uniform definition, since it will avoid inconsistencies across state lines, and will generally favor a definition that expands the number of damaged vehicles that qualify as salvage. However, certain interest groups, including repair shops and some insurance
 
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associations, may oppose this type of legislation. National legislation has not yet been enacted in this area, and there can be no assurance that such legislation will be enacted in the future.
Anti-Car Theft Act
In 1992, Congress enacted the Anti-Car Theft Act to deter trafficking in stolen vehicles. The purpose of the law is to implement an electronic system to track and monitor vehicle identification numbers and major automotive parts. In January 2009, the U.S. Department of Justice implemented the portion of the system to track and monitor vehicle identification numbers. The portion of the system that would track and monitor major automotive parts would require various entities, including automotive parts recyclers like us, to inspect salvage vehicles for the purpose of collecting the part number for any “covered major part.” The Department of Justice has not promulgated rules on this portion of the system, and therefore there has been no progress on the implementation of the system to track and monitor major automotive parts. However, if this system is fully implemented, the requirement to collect the information would place substantial burdens on vehicle recyclers, including us, that otherwise would not normally exist. It would place similar burdens on repair shops, which may further discourage the use by such shops of recycled products.
Legislation Affecting Automotive Repair Parts
Most states have laws that restrict the use of aftermarket parts in collision repair work. These restrictions range from the requirement to disclose to the vehicle owner the use of aftermarket parts in the repair process to the requirement to have aftermarket parts certified by an independent testing organization. Some jurisdictions have laws that prohibit or restrict the sale of certain recycled OEM products that we provide, such as airbags. Additional laws of this kind may be introduced in the future. An increase in the number of states passing such legislation or the passing of legislation with prohibitions or restrictions that are more severe than current laws could have a material adverse impact on our business. Additionally, Congress could enact federal legislation restricting the use of aftermarket and recycled automotive parts in the repair process.
Seasonality
Our operating results are subject to quarterly variations based on a variety of factors, influenced primarily by seasonal changes in weather patterns. During the winter months we tend to have higher demand for our products because there are more weather related accidents. In addition, the cost of salvage vehicles tends to be lower as weather related accidents generate a larger supply of total loss vehicles.
 
ITEM 1A.	RISK FACTORS	
Risks Relating to Our Business
Our operating results and financial condition have been and could continue to be adversely affected by the economic conditions in the United States.
The recent declining economic conditions in the U.S. have adversely impacted our business. Such conditions have resulted in fewer miles driven, fewer accident claims and a reduction of vehicle repairs. In the event that the U.S. economic conditions do not improve or continue to decline, we expect that our business will continue to be negatively affected.
We face intense competition from local, national, and internet-based vehicle products providers, and this competition could negatively affect our business.
The vehicle replacement products industry is highly competitive and is served by numerous suppliers of OEM products, recycled OEM products, aftermarket products, and refurbished products. Within each of these categories of suppliers, there are local owner-operated companies, larger regional suppliers, national providers,
 
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and internet-based suppliers. Providers of vehicle replacement products that have traditionally sold only certain categories of such products may decide to expand their product offerings into other categories of vehicle replacement products, which may further increase competition. Some of our current and potential competitors may have more operational expertise; greater financial, technical, manufacturing, distribution, and other resources; longer operating histories; lower cost structures; and better relationships in the insurance and vehicle repair industries, than we do. In certain regions of the U.S., local vehicle recycling companies have formed cooperative efforts to compete in the recycled OEM products industry. As a result of these factors, our competitors may be able to provide products that we are unable to supply, provide their products at lower costs, or supply products to customers that we are unable to serve.
We believe that substantially in excess of 50% of collision parts by dollar amount are supplied by OEMs, with the balance being supplied by distributors like us. The OEMs are therefore in a position to exert pricing pressure in the marketplace. We compete with the OEMs primarily on price and to a lesser extent on perceived quality. From time to time, OEMs have experimented with reducing prices on specific products to meet the lower-priced alternative products. If such price reductions were to become widespread, it could have a material adverse impact on our business.
Claims by OEMs relating to aftermarket products could adversely affect our business.
OEMs have attempted to use claims of intellectual property infringement against manufacturers and distributors of aftermarket products to restrict or eliminate the sale of aftermarket products that are the subject of the claims. The OEMs have brought such claims in federal court and with the United States International Trade Commission. Since our acquisition of Keystone Automotive Industries, Inc. in October 2007, the distribution of aftermarket products constitutes a significantly larger percentage of our business.
In December 2005, Ford Global Technologies, LLC initiated a complaint with the International Trade Commission against six companies, including Keystone, alleging that certain aftermarket parts imported into the United States infringed on 14 design patents held by Ford Global. In December 2006, an administrative law judge of the International Trade Commission preliminarily ruled that seven of the Ford Global design patents were valid and that the importation of automotive parts covered by these seven patents violated Section 337 of the Tariff Act of 1930. The International Trade Commission affirmed the ruling of the administrative law judge and issued an order prohibiting further importation of automotive parts covered by the patents. The parties to the action have appealed the decision to the United States Circuit Court of Appeals for the Federal Circuit.
In May 2008, Ford Global filed another complaint with the International Trade Commission. The complaint alleges that LKQ Corporation, Keystone Automotive Industries, Inc, and six other entities import and sell certain automotive parts relating to the 2005 Ford Mustang that infringe eight Ford design patents. On May 29, 2008, the International Trade Commission issued a Notice of Investigation based on Ford’s complaint and has set November 2009 as the target date for completion of the investigation.
United States Patent and Trademark Office records indicate that OEMs are seeking and obtaining more design patents then they have in the past. To the extent that the OEMs are successful with intellectual property infringement claims, we could be restricted or prohibited from selling certain aftermarket products which could have an adverse effect on our business. We will likely incur significant expenses investigating and defending intellectual property infringement claims. In addition, an unexpected result of the intellectual property infringement litigation is that CAPA is decertifying parts that are the subject of the claims. Lack of CAPA certification may negatively impact us because many major insurance companies recommend or require the use of CAPA certified aftermarket parts.
 
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An adverse change in our relationships with auction companies or our suppliers could increase our expenses and hurt our ability to serve our customers.
Most of our salvage inventory is obtained from vehicles offered at salvage auctions by several companies that own auction facilities in numerous locations across the U.S. We do not have contracts with any auction company. According to industry analysts, a small number of companies controls a large percentage of the salvage auction market in the U.S. If an auction company prohibited us from participating in its auctions, or significantly raised its fees, our business could be adversely affected through higher costs or the resulting potential inability to service our customers. Moreover, we are facing increased competition in the purchase of salvage vehicles from shredders and scrap recyclers, internet-based buyers, and others. This increase in the number of bidders may increase our cost of goods sold for recycled OEM products. Most states regulate bidders to help ensure that salvage vehicles are purchased for legal and legitimate purposes. Auction companies have been actively seeking to reduce or eliminate these regulations, which if successful would further increase the number of bidders.
We also acquire inventory directly from insurance companies, OEMs, aftermarket parts manufacturers, and others. To the extent that these suppliers decide to discontinue these arrangements, our business could be adversely affected through higher costs or the resulting potential inability to service our customers.
We are dependent on a relatively small number of suppliers of aftermarket products. Although alternative suppliers exist for substantially all aftermarket products distributed by us, the loss of any one supplier could have a material adverse effect on us until alternative suppliers are located and have commenced providing products. Moreover, our operations are subject to the customary risks of doing business abroad, including, among other things, transportation delays, political instability, currency fluctuations and the imposition of tariffs, import and export controls and other non-tariff barriers (including changes in the allocation of quotas), as well as the uncertainty regarding future relations between China and Taiwan. Because a substantial volume of our sales involves parts manufactured from sheet metal, we can be adversely impacted if sheet metal becomes unavailable or is only available at higher prices, which we may not be able to pass on to our customers.
If our business relationships with insurance companies end, we may lose important sales opportunities.
We rely on business relationships with several insurance companies. These insurance companies encourage vehicle repair facilities to use products we provide. Our arrangements with these companies may be terminated at any time. We rely on these relationships for sales to some collision repair shops, and a termination of these relationships may result in a loss of sales, which could adversely affect our results of operations.
In an Illinois lawsuit involving State Farm Mutual Automobile Insurance Company ( “Avery v. State Farm” ), a jury decided in October 1999 that State Farm breached certain insurance contracts with its policyholders by using non-OEM parts to repair damaged vehicles when use of such parts did not restore the vehicle to its “pre-loss condition.” The jury found that State Farm misled its customers by not disclosing the use of non-OEM parts and the alleged inferiority of those parts. The jury assessed damages against State Farm of $456 million, and the judge assessed an additional $730 million of disgorgement and punitive damages for violations of the Illinois Consumer Fraud Act. In April 2001, the Illinois Appellate Court upheld the verdict but reduced the damage award by $130 million because of duplicative damage awards. On August 18, 2005, the Illinois Supreme Court reversed the awards made by the circuit court and found, among other things, that the plaintiffs had failed to establish any breach of contract on the part of State Farm. The U.S. Supreme Court declined to hear an appeal of this case. As a result of this case, some insurance companies had reduced or eliminated their use of aftermarket products. Our financial results could be affected, perhaps adversely, if insurance companies modified or terminated the arrangements pursuant to which repair shops buy aftermarket or recycled OEM products from us due to a fear of similar claims with respect to such products.
 
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We may not be able to sell our products due to existing or new laws and regulations prohibiting or restricting the sale of recycled OEM, aftermarket or refurbished products.
Some jurisdictions have enacted laws prohibiting or severely restricting the sale of certain recycled OEM products that we provide, such as airbags. These and other jurisdictions could enact similar laws or could prohibit or severely restrict the sale of additional recycled OEM products. Restrictions on the products we are able to sell could decrease our revenue and have an adverse effect on our business and operations.
Most states have passed laws that prohibit or limit the use of aftermarket products in collision repair work and/or require enhanced disclosure or vehicle owner consent before using aftermarket products in such repair work. Additional legislation of this kind may be introduced in the future. If additional laws prohibiting or restricting the use of aftermarket products are passed, it could have an adverse impact on our aftermarket products business.
Certain organizations test the quality and safety of vehicle replacement products. In the event that such organizations decide that a particular vehicle product does not meet applicable quality or safety standards, we may decide to discontinue sales of such product or insurance companies may decide to discontinue authorization of repairs using such product. Such events could adversely affect our business.
We may not be able to successfully acquire new operations or integrate acquisitions, which could cause our business to suffer.
We may not be able to successfully complete potential strategic acquisitions if we cannot reach agreement on acceptable terms or for other reasons. If we buy a company or a division of a company, we may experience difficulty integrating that company’s or division’s personnel and operations, which could negatively affect our operating results. In addition:
 
 	•	 	the key personnel of the acquired company may decide not to work for us;	
 
 	•	 	we may experience business disruptions as a result of information technology systems conversions;	
 
 	•	 	we may experience additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, and financial reporting;	
 
 	•	 	we may be held liable for environmental risks and liabilities as a result of our acquisitions, some of which we may not have discovered during our due diligence;	
 
 	•	 	our ongoing business may be disrupted or receive insufficient management attention; and	
 
 	•	 	we may not be able to realize the cost savings or other financial benefits we anticipated, either in the amount or in the time frame that we expect.	
The acquisition of Keystone in October 2007 was our largest acquisition to date. Because of the magnitude of the Keystone acquisition, significant integration challenges remain, including the realization of the total projected cost savings, synergies and revenue enhancements that we anticipated.
In connection with future acquisitions, we may assume the liabilities of the companies we acquire. These liabilities, including liabilities for environmental-related costs, could materially and adversely affect our business. We may have to incur debt or issue equity securities to pay for any future acquisition, the issuance of which could involve the imposition of restrictive covenants or be dilutive to our existing stockholders.
Financing the Keystone acquisition substantially increased our leverage and involves restrictions on our business.
In connection with the acquisition of Keystone, we entered into a senior secured debt financing facility with a group of lenders. Our total outstanding indebtedness (including bank financing, letters of credit, and notes
 
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payable in connection with acquisitions) as of December 31, 2008 was $666.1 million. The increase in our indebtedness may reduce our flexibility to respond to changing business and economic conditions or to fund capital expenditure or working capital needs because we will require additional funds to service our indebtedness.
In addition, the senior secured credit agreement contains operating and financial restrictions and requires that we satisfy certain financial covenants. The failure to comply with any of these covenants would cause a default under the credit agreement. A default, if not waived, could result in acceleration of our debt, in which case the debt would become immediately due and payable. If this occurs, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if new financing were available, it may be on terms that are less attractive to us than our existing credit facility or it may be on terms that are not acceptable to us.
Lehman Commercial Paper Inc. is the administrative agent and swing line lender under our credit agreement and had committed to provide $15 million under the revolving credit facility that is part of the credit agreement. Lehman Commercial Paper filed for protection under Chapter 11 of the Federal Bankruptcy Code on October 15, 2008. Accordingly, our access to same day borrowing of swing line loans and the $15 million of revolving credit is doubtful. We do not believe that an inability to draw on the $15 million revolving credit facility or to access our swing line facility will have a material adverse impact on us. However, to the extent that other lenders that are part of our credit agreement fail or file for bankruptcy protection, our access to funds under our revolving credit facility may be further adversely affected, which could harm our ability to do business.
Our future capital needs may require that we seek debt financing or additional equity funding that, if not available, could cause our business to suffer.
We may need to raise additional funds in the future to, among other things, fund our existing operations, improve or expand our operations, respond to competitive pressures, or make acquisitions. From time to time, we may raise additional funds through public or private financing, strategic alliances, or other arrangements. However, the recent turmoil in the credit markets has resulted in severely tighter credit conditions, which could affect our ability to raise additional funds until the turmoil subsides. If adequate funds are not available on acceptable terms, we may be unable to meet our business or strategic objectives or compete effectively. If we raise additional funds by issuing equity securities, stockholders may experience dilution of their ownership interests, and the newly issued securities may have rights superior to those of the common stock. If we raise additional funds by issuing debt, we may be subject to further limitations on our operations. If we fail to raise capital when needed, our business will be negatively affected.
Our annual and quarterly performance may fluctuate.
Our revenue, cost of goods sold, and operating results have fluctuated on a quarterly and annual basis in the past and can be expected to continue to fluctuate in the future as a result of a number of factors, some of which are beyond our control. Future factors that may affect our operating results include, but are not limited to, those listed in the Special Note on Forward-Looking Statements in this Annual Report on Form 10-K. Due to these factors, our operating results in future periods can be expected to fluctuate. Accordingly, our results of operations may not be indicative of future performance. These fluctuations in our operating results may cause our results to fall below the expectations of public market analysts and investors, which could cause our stock price to decline.
Fluctuations in the prices of scrap metal and other metals could adversely affect our financial results.
Our wholesale recycled OEM operations and our self-service retail recycled OEM operations generate scrap metal and other metals that we sell. After we dismantle a salvage vehicle for wholesale parts and after vehicles have been used in our self-service business, the remaining vehicle hulks are sold to scrap processors and other remaining metals are sold to processors and brokers of metals. In addition, we receive “crush only” vehicles from
 
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other companies, including OEMs, which we dismantle and which generate scrap metal and other metals. The prices of scrap and other metals have historically fluctuated due to market factors, sometimes significantly. In addition, buyers may stop purchasing metals entirely due to excess supply. To the extent the prices of metals decrease materially or buyers stop purchasing metals, our revenue from such sales will suffer and a write-down of inventory value could be required. The cost of our wholesale recycled OEM and our self-service inventory purchases may also decrease as a result of falling scrap metal and other metals prices, but there can be no assurance that our inventory purchasing cost will decrease the same amount or at the same rate as the scrap metal and other metals prices, and there may be a delay between the scrap metal and other metals price reductions and any inventory cost reductions. Our operating results in the fourth quarter of 2008 were adversely affected by the declining scrap metal and other metal prices as described in the Results of Operations section in Item 7 of this Annual Report on Form 10-K.
If we determine that our goodwill has become impaired, we may incur significant charges to our pre-tax income.
Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. In the future, goodwill and intangible assets may increase as a result of future acquisitions. Goodwill and intangible assets are reviewed at least annually for impairment. Impairment may result from, among other things, deterioration in the performance of acquired businesses, adverse market conditions, and adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business. As of December 31, 2008, our total goodwill, subject to future impairment testing, was approximately $923.8 million. For further discussion of our annual impairment test, see “Goodwill Impairment” in the Critical Accounting Estimates section of Item 7 in this Annual Report on Form 10-K.
If the number of vehicles involved in accidents declines, our business could suffer.
Because our business depends on vehicle accidents for both the supply of recycled OEM products and the demand for repairs using our products, factors which influence the number and/or severity of accidents, including, but not limited to, the number of vehicles on the road, the number of miles driven, the ages of drivers, the use of cellular telephones and other electronic equipment by drivers, the congestion of traffic, the occurrence and severity of certain weather conditions, the use of alcohol and drugs by drivers, and the condition of roadways, impact our business. In this regard, a number of states and municipalities have adopted, or are considering adopting, legislation banning the use of handheld cellular telephones while driving and such restrictions could lead to a decline in accidents. To the extent vehicle manufacturers develop new accident avoidance systems, the number and severity of accidents could decrease. Moreover, an increase in fuel prices may cause the number of vehicles on the road to decline as motorists seek alternative transportation options and this also could lead to a decline in accidents.
Governmental agencies may refuse to grant or renew our operating licenses and permits.
Our operating subsidiaries must obtain licenses and permits from state and local governments to conduct their operations. When we develop or acquire a new facility, we must seek the approval of state and local units of government. Governmental agencies may resist the establishment of a vehicle recycling or refurbishing facility in their communities. There can be no assurance that future approvals or transfers will be granted. In addition, there can be no assurance that we will be able to maintain and renew the licenses and permits our operating subsidiaries currently hold.
If we lose our key management personnel, we may not be able to successfully manage our business or achieve our objectives.
Our future success depends in large part upon the leadership and performance of our executive management team and key employees at the operating level. If we lose the services of one or more of our executive officers or key employees, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to successfully manage our business or achieve our business objectives. If we lose
 
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the services of any of our key employees at the operating or regional level, we may not be able to replace them with similarly qualified personnel, which could harm our business.
We rely on information technology in critical areas of our operations and a disruption relating to such technology could harm our business.
We use information technology systems owned by other companies for management of our facilities and our financial functions. In the event that the providers of these systems terminate their relationships with us, we could suffer disruptions to our operations.
In addition, we continually monitor these systems to find areas for improvement. In the event that we decided to switch providers or to implement our own systems, we may also suffer disruptions to our business. We may be unsuccessful in the development of our own systems, and we may underestimate the costs and expenses of developing and implementing our own systems. Also, our revenue may be hampered during the period of implementing an alternative system, which period could extend longer than we anticipated.
If we experience problems with our fleet of trucks, our business could be harmed.
We use a fleet of trucks to deliver the majority of the products we sell. We are subject to the risks associated with providing trucking services, including inclement weather, disruptions in the transportation infrastructure, availability and price of fuel, liabilities arising from accidents to the extent we are not covered by insurance, and insurance premium increases. In addition, our failure to deliver products in a timely and accurate manner could harm our reputation and brand, which could have a material adverse effect on our business.
We are subject to environmental regulations and incur costs relating to environmental matters.
We are subject to various federal, state, and local environmental protection and health and safety laws and regulations governing, among other things: the emission and discharge of hazardous materials into the ground, air, or water; exposure to hazardous materials; and the generation, handling, storage, use, treatment, identification, transportation, and disposal of industrial by-products, waste water, storm water, and mercury and other hazardous materials.
We are also required to obtain environmental permits from governmental authorities for certain of our operations. If we violate or fail to obtain or comply with these laws, regulations, or permits, we could be fined or otherwise sanctioned by regulators. We could also become liable if employees or other parties are improperly exposed to hazardous materials.
Under certain environmental laws, we could be held responsible for all of the costs relating to any contamination at, or migration to or from, our or our predecessors’ past or present facilities and at independent waste disposal sites. These laws often impose liability even if the owner or operator did not know of, or was not responsible for, the release of such hazardous substances.
Environmental laws are complex, change frequently, and have tended to become more stringent over time. Our costs of complying with current and future environmental and health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances, may adversely affect our business, results of operations, or financial condition.
We could be subject to product liability claims.
If customers of repair shops that purchase our products are injured or suffer property damage, we could be subject to product liability claims. The successful assertion of this type of claim could have an adverse effect on our business or financial condition.
 
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Regulations that may be issued under the Anti-Car Theft Act could harm our business.
In 1992, Congress enacted the Anti-Car Theft Act to deter trafficking in stolen vehicles. The purpose of the law is to implement an electronic system to track and monitor vehicle identification numbers and major automotive parts. In January 2009, the U.S. Department of Justice implemented the portion of the system to track and monitor vehicle identification numbers. The portion of the system that would track and monitor major automotive parts would require various entities, including automotive parts recyclers like us, to inspect salvage vehicles for the purpose of collecting the part number for any “covered major part.” The Department of Justice has not promulgated rules on this portion of the system, and therefore there has been no progress on the implementation of the system to track and monitor major automotive parts. However, if this system is fully implemented, the requirement to collect the information would place substantial burdens on vehicle recyclers, including us, that otherwise would not normally exist. It would place similar burdens on repair shops, which may further discourage the use by such shops of recycled products.
Risks Relating to Our Common Stock
Future sales of our common stock may depress our stock price.
We and our stockholders may sell shares of common stock in the future. We may also issue shares of common stock under our equity incentive plan or in connection with future acquisitions. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the price of our common stock. Sales of substantial amounts of common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may cause the price of our common stock to fall.
Delaware law, our charter documents and our loan documents may impede or discourage a takeover, which could affect the price of our stock.
The anti-takeover provisions of our certificate of incorporation and bylaws, our loan documents and Delaware law could, together or separately, impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. Our certificate of incorporation and bylaws have provisions that could discourage potential takeover attempts and make attempts by stockholders to change management more difficult. The credit agreement we entered into in connection with our acquisition of Keystone provides that a change of control is an event of default. Our incorporation under Delaware law and these provisions could also impede an acquisition, takeover, or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the price of our common stock.
 
ITEM 1B.	UNRESOLVED STAFF COMMENTS	
None.
 
ITEM 2.	PROPERTIES	
Our properties are described in “Item 1—Business—Our Facilities” above, and such description is incorporated by reference into this Item 2. Our properties are sufficient to meet our present needs, and we do not anticipate any difficulty in securing additional space to conduct operations or additional office space, as needed, on terms acceptable to us.
 
ITEM 3.	LEGAL PROCEEDINGS	
We are from time to time subject to various claims and lawsuits incidental to our business. In the opinion of management, currently outstanding claims and suits other than those described below, individually or in the aggregate, will not have a material adverse effect on our consolidated financial statements.
 
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On December 2, 2005, Ford Global Technologies, LLC (“Ford”) filed a complaint under Section 337 of the Tariff Act of 1930 with the United States International Trade Commission (“USITC”) against Keystone Automotive Industries, Inc. and five other named Respondents, including four Taiwan-based manufacturers, alleging that certain aftermarket parts imported into the United States infringed on 14 design patents that Ford alleges cover eight parts on the 2004-2005 Ford F-150 truck.
On December 4, 2006, an administrative law judge of the USITC preliminarily ruled that seven of the Ford design patents were valid and that the importation of automotive parts covered by those seven patents violated Section 337 of the Tariff Act of 1930. On June 6, 2007, the USITC affirmed the ruling of the administrative law judge and issued an order prohibiting further importation of automotive parts covered by the patents. The USITC’s decision became final on August 6, 2007 upon the expiration without action of the 60-day Presidential review period. The parties have appealed the decision to the United States Circuit Court of Appeals for the Federal Circuit. The appeal is pending.
On May 2, 2008, Ford filed with the USITC another complaint under section 337 of the Tariff Act of 1930. The complaint alleges that LKQ Corporation, Keystone Automotive, and six other entities (collectively, the “Mustang Respondents”) import and sell certain automotive parts relating to the 2005 Ford Mustang that infringe eight Ford design patents. On May 29, 2008, the USITC issued a Notice of Investigation based on Ford’s complaint. The USITC’s Notice of Investigation was published in the Federal Register on June 5, 2008. On June 23, 2008, the Mustang Respondents filed their Response to the Complaint and Notice of Investigation. In the Response, the Mustang Respondents denied, among other things, that any of the Ford design patents is valid and/or enforceable and, accordingly, denied each allegation of infringement. The Mustang Respondents further asserted several affirmative defenses. The parties have substantially completed discovery. The USITC has set November 2009 as the target date for completion of the investigation.
We will continue to vigorously defend the December 2005 action and the May 2008 action. At the time the exclusion order was issued in the December 2005 action, the parts that were subject to the order comprised only a minimal amount of our sales. Similarly, the parts that relate to the May 2008 action comprise only a minimal amount of our sales. However, as such parts become incorporated into more vehicles over time, it is likely that the amount of our sales of such parts will increase or would have increased substantially. If the design patents in question are ultimately upheld as valid and infringed, it is not anticipated that the loss of sales of these parts over time will be materially adverse to our financial position, results of operations or cash flows. However, depending upon the nature and extent of any adverse ruling, OEMs may attempt to assert similar allegations based upon design patents on a significant number of parts for several of their models, which over time could have a material adverse impact on us and the entire aftermarket parts industry.
 
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	
None.
 
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PART II
 
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	
Our common stock is traded on the Nasdaq Global Select Market under the symbol “LKQX.” At December 31, 2008, there were approximately 45 record holders of our common stock. The following table sets forth, for the periods indicated, the range of the high and low sales prices of shares of our common stock on Nasdaq.

 	  	High	  	Low	
2007	  			  			
First Quarter	  	$	11.51	  	$	9.93	
Second Quarter	  	 	13.03	  	 	10.80	
Third Quarter	  	 	17.79	  	 	12.12	
Fourth Quarter	  	 	23.66	  	 	16.78	
			
2008	  			  			
First Quarter	  	 	25.00	  	 	17.21	
Second Quarter	  	 	23.25	  	 	16.43	
Third Quarter	  	 	21.60	  	 	15.96	
Fourth Quarter	  	 	16.90	  	 	8.70	
We have not paid any cash dividends on our common stock. We intend to continue to retain our earnings to finance our growth and for general corporate purposes. We do not anticipate paying any cash dividends in the foreseeable future. In addition, our credit facility contains, and future financing agreements may contain, financial covenants and limitations on payment of any cash dividends or other distributions of assets.
 
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The following graph compares the percentage change in the cumulative total returns on our common stock, the NASDAQ Stock Market (U.S.) Index and the following group of peer companies (the “Peer Group”): Copart, Inc., O’Reilly Automotive, Inc., Genuine Parts Company, and Fastenal Co., for the period beginning on December 31, 2003 and ending on December 31, 2008 (which was the last day of our 2008 fiscal year). The stock price performance in the following graph is not necessarily indicative of future stock price performance. The graph assumes that the value of an investment in each of the Company’s common stock, the NASDAQ Stock Market (U.S.) Index and the Peer Group was $100 on December 31, 2003 and that all dividends, where applicable, were reinvested.
Comparison of Cumulative Return
Among LKQ Corporation, the NASDAQ Stock Market (U.S.) Index and the Peer Group

																			
 	  	12/31/2003	  	12/31/2004	  	12/31/2005	  	12/31/2006	  	12/31/2007	  	12/31/2008	
LKQ Corporation	  	$	100	  	$	112	  	$	193	  	$	256	  	$	468	  	$	260	
NASDAQ Stock Market (U.S.) Index	  	$	100	  	$	109	  	$	111	  	$	123	  	$	136	  	$	82	
Peer Group	  	$	100	  	$	132	  	$	151	  	$	159	  	$	174	  	$	147	
The following table provides information about our common stock that may be issued under all of  our equity compensation plans as of December 31, 2008.
Equity Compensation Plan Information

Plan Category	  	Number of
securities to be issued
upon exercise of
outstanding options,
warrants, and rights
(a)	  	Weighted-average
exercise price of
outstanding options,
warrants, and rights
(b)	  	Number of
securities remaining
available for future
issuance under equity
compensation plans (excluding
securities reflected in column (a))
(c)	
Equity compensation plans approved by stockholders	  	9,663,588	  	$	7.27	  	5,374,928	
Equity compensation plans not approved by stockholders	  	—  	  	$	—  	  	—  	
	  	 	  			  	 	
Total	  	9,663,588	  			  	5,374,928	

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ITEM 6.	SELECTED FINANCIAL DATA	
The following selected consolidated financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

 	  	Year Ended December 31,	 	
 	  	2004	 	 	2005	 	 	2006	 	 	2007	 	 	2008	 	
 	  	(a)	 	 	(b)	 	 	(c)	 	 	(d)	 	 	(e)	 	
Statements of Income Data:	  				 				 				 				 				
Revenue	  	$	424,756	 	 	$	547,392	 	 	$	789,381	 	 	$	1,126,825	 	 	$	1,937,301	 	
Cost of goods sold	  	 	227,140	 	 	 	289,788	 	 	 	431,832	 	 	 	621,076	 	 	 	1,080,632	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross Margin	  	 	197,616	 	 	 	257,604	 	 	 	357,549	 	 	 	505,749	 	 	 	856,669	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income	  	 	34,907	 	 	 	52,942	 	 	 	77,166	 	 	 	122,657	 	 	 	197,696	 	
Other (income) expense	  				 				 				 				 				
Interest, net	  	 	1,505	 	 	 	1,887	 	 	 	5,824	 	 	 	16,012	 	 	 	35,537	 	
Other, net	  	 	(455	)	 	 	(628	)	 	 	(1,479	)	 	 	(1,626	)	 	 	(1,429	)	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before provision for income taxes	  	 	33,857	 	 	 	51,683	 	 	 	72,821	 	 	 	108,271	 	 	 	163,588	 	
Provision for income taxes	  	 	13,284	 	 	 	20,796	 	 	 	28,426	 	 	 	42,370	 	 	 	63,689	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	20,573	 	 	$	30,887	 	 	$	44,395	 	 	$	65,901	 	 	$	99,899	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic earnings per share	  	$	0.26	 	 	$	0.35	 	 	$	0.42	 	 	$	0.58	 	 	$	0.73	 	
Diluted earnings per share	  	$	0.23	 	 	$	0.32	 	 	$	0.40	 	 	$	0.55	 	 	$	0.71	 	
Shares used in per share calculation-basic(f)	  	 	80,210	 	 	 	88,039	 	 	 	105,655	 	 	 	114,161	 	 	 	136,488	 	
Shares used in per share calculation-diluted(f)	  	 	89,654	 	 	 	97,431	 	 	 	111,633	 	 	 	119,937	 	 	 	141,023	 	
		
 	  	Year Ended December 31,	 	
 	  	2004	 	 	2005	 	 	2006	 	 	2007	 	 	2008	 	
Other Financial Data:	  				 				 				 				 				
Net cash provided by operating activities	  	$	25,901	 	 	$	37,533	 	 	$	52,381	 	 	$	54,369	 	 	$	132,961	 	
Net cash used in investing activities	  	 	(87,823	)	 	 	(126,022	)	 	 	(110,657	)	 	 	(905,821	)	 	 	(138,910	)	
Net cash provided by financing activities	  	 	47,452	 	 	 	90,050	 	 	 	59,134	 	 	 	921,629	 	 	 	11,793	 	
Capital expenditures(g)	  	 	93,025	 	 	 	136,342	 	 	 	116,844	 	 	 	908,122	 	 	 	143,435	 	
Depreciation and amortization	  	 	6,872	 	 	 	8,574	 	 	 	12,086	 	 	 	18,018	 	 	 	33,421	 	
						
Balance Sheet Data:	  				 				 				 				 				
Total assets	  	$	288,275	 	 	$	439,426	 	 	$	564,355	 	 	$	1,692,655	 	 	$	1,881,804	 	
Working capital	  	 	77,879	 	 	 	103,776	 	 	 	122,420	 	 	 	389,469	 	 	 	441,705	 	
Long-term obligations, including current portion	  	 	50,262	 	 	 	47,477	 	 	 	100,447	 	 	 	658,462	 	 	 	642,874	 	
Stockholders’ equity	  	 	204,071	 	 	 	341,220	 	 	 	401,202	 	 	 	849,777	 	 	 	1,020,506	 	

(a)	Includes the results of operations of six businesses since their respective acquisition dates in 2004.	
 
(b)	Includes the results of operations of eight businesses since their respective acquisition dates in 2005.	
 
(c)	Includes the results of operations of ten businesses since their respective acquisition dates in 2006.	
 
(d)	Includes the results of operations of Keystone since our acquisition of Keystone on October 12, 2007, and 11 other businesses since their respective acquisition dates in 2007.	
 
(e)	Includes the results of operations of Pick-Your-Part Auto Wrecking since our acquisition of Pick-Your-Part on August 25, 2008 and seven other businesses since their respective acquisition dates in 2008.	
 
(f)	We sold 12,870,000 shares of our common stock on October 4, 2005 in connection with a follow-on public offering. We also sold 23,600,000 shares of our common stock on September 19, 2007 in connection with a follow-on public offering. Accordingly, the shares used in the per share calculations for basic and diluted earnings per share in each of 2005 and 2007 do not fully reflect the impact of the transactions that occurred during those years.	
 
(g)	Includes acquisitions and non-cash property additions.	
 
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ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	
Overview
We provide replacement systems, components, and parts needed to repair vehicles (cars and trucks). Buyers of vehicle replacement products have the option to purchase from primarily four sources: new products produced by original equipment manufacturers (“OEMs”), which are commonly known as OEM products; new products produced by companies other than the OEMs, which are sometimes referred to as “aftermarket” products; recycled products originally produced by OEMs, which we refer to as recycled OEM products; and used products that have been refurbished. We participate in the market for recycled OEM products as well as the market for collision repair aftermarket products. We obtain aftermarket products and salvage vehicles from a variety of sources, and we dismantle the salvage vehicles to obtain a comprehensive range of vehicle products that we distribute into the vehicle repair market. We also refurbish and sell bumpers, wheels, head lamps and tail lamps.
We are the largest nationwide provider of recycled OEM products and related services, with sales, processing, and distribution facilities that reach most major markets in the United States. In October 2007, we acquired Keystone Automotive Industries, Inc., the nation’s leading distributor of aftermarket collision parts. As a result, we are the largest nationwide provider of aftermarket collision replacement products, and refurbished bumper covers and wheels. We believe there are opportunities for growth in both product lines through acquisitions and internal development.
Our revenue, cost of goods sold, and operating results have fluctuated on a quarterly and annual basis in the past and can be expected to continue to fluctuate in the future as a result of a number of factors, some of which are beyond our control. Factors that may affect our operating results include, but are not limited to, those listed in the Special Note on Forward-Looking Statements in Item 1 of this Annual Report on Form 10-K. Due to these factors, our operating results in future periods can be expected to fluctuate. Accordingly, our historical results of operations may not be indicative of future performance.
Acquisitions
Since our inception in 1998 we have pursued a growth strategy of both organic growth and acquisitions. We have pursued acquisitions that we believe will help drive profitability, cash flow and stockholder value. Our principal focus for acquisitions is companies that will expand our geographic presence and our ability to provide a wider choice of alternative vehicle replacement products and services to our customers.
During 2006, we acquired ten businesses (one in the wheel refurbishing and distribution business, two in the aftermarket automotive parts business and seven in the recycled OEM automotive parts business) for an aggregate of approximately $71.1 million in cash and $7.2 million in notes issued to the sellers. These business acquisitions enabled us to expand our product offerings to our customers, serve new markets and expand our presence in existing markets.
In October 2007, we acquired Keystone, the nation’s leading distributor of aftermarket collision parts, for $806.8 million, net of cash acquired. As a result, we are now the largest nationwide provider of aftermarket collision replacement products and refurbished bumpers and wheels. During 2007, we also acquired 11 other businesses (eight in the recycled OEM products business, one that refurbishes and distributes head lamps and tail lamps, and two in the aftermarket products business). These acquisitions included two businesses in Canada. These business acquisitions enabled us to expand our presence in existing markets, serve new market areas and expand our product line offering.
In August 2008, we acquired Pick-Your-Part Auto Wrecking (“PYP”), an operator of multiple self-service facilities in the state of California. During 2008, we also acquired seven other businesses (three in the recycled OEM parts business, three in the recycled OEM heavy truck parts businesses and one wheel polishing business).
 
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These acquisitions included two businesses in Canada. The 2008 acquisitions enabled us to expand our presence in existing markets, increase our coverage of the Canadian market and become a provider of recycled OEM heavy truck parts.
Sources of Revenue
We generate the majority of our revenue from the sale of vehicle replacement products and related services. In 2008, sales of vehicle replacement products represented approximately 86% of our consolidated sales. We divide our vehicle replacement products into two categories: (i) recycled products and related products and services and (ii) aftermarket, other new and refurbished products. Recycled products, which includes our salvage and self-service operations, was our largest sales category in prior years. With the acquisition of Keystone, the percentage of our revenue derived from the sales of aftermarket, other new and refurbished products now exceeds the recycled products category.
We sell the majority of our vehicle replacement products to collision repair shops and mechanical repair shops. Our vehicle replacement products include engines, transmissions, front-ends, doors, trunk lids, bumpers, hoods, fenders, grilles, valances, wheels, head lamps, and tail lamps. We sell extended warranty contracts for certain mechanical products. These contracts cover the cost of parts and labor and are sold for periods of six months, one year, or two years. We defer the revenue from such contracts and recognize it ratably over the term of the contracts. The demand for our products and services is influenced by several factors, including the number of vehicles in operation, the number of miles being driven, the frequency and severity of vehicle accidents, availability and pricing of new parts, seasonal weather patterns, and local weather conditions. Additionally, automobile insurers exert significant influence over collision repair shops as to how an insured vehicle is repaired and the cost level of the products used in the repair process. Accordingly, we consider automobile insurers to be key demand drivers of our products. While they are not our direct customers, we do provide insurance carriers services in an effort to promote the increased usage of alternative replacement products in the repair process. Such services include the review of vehicle repair order estimates, as well as direct quotation services to their adjusters. We neither charge a fee to the insurance carriers for these services nor adjust our pricing of parts for our customers when we perform these services for insurance carriers. There is no standard price for recycled OEM products, but rather a pricing structure that varies from day to day based upon such factors as product availability, quality, demand, new OEM replacement product prices, the age of the vehicle being repaired, and competitor pricing. The pricing for aftermarket and refurbished products is determined based on a number of factors, including availability, quality, demand, new OEM replacement product prices, and competitor pricing.
In 2008, revenue from other sources represented approximately 14% of our consolidated sales. These other sources include bulk sales to mechanical remanufacturers, scrap sales, and sales of aluminum ingots and sows. We derive scrap metal from several sources, including OEM’s and other companies that contract with us to dismantle and scrap certain vehicles (which we refer to as “crush only” vehicles) and from vehicles that have been used in both our wholesale and self service recycling operations. Our revenue from other sources has increased since 2006 in dollar terms but has declined as a percentage of total sales. Revenue from other sources has grown in recent years due to higher scrap sales from our recycle and wheel operations, including crush only vehicles, and higher bulk sales of certain products to mechanical remanufacturers.
When we obtain mechanical products from dismantled vehicles and determine they are damaged, or when we have a surplus of a certain mechanical product type, we sell them in bulk to mechanical remanufacturers. The majority of these products are sorted by product type and model type. Examples of such products are engine blocks and heads, transmissions, starters, alternators, and air conditioner compressors. After we have recovered all the products we intend to resell, the remaining materials are crushed and sold to scrap processors.
Cost of Goods Sold
Our cost of goods sold for recycled OEM products includes the price we pay for the salvage vehicle and, where applicable, auction, storage, and towing fees. We are facing increasing competition in the purchase of
 
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salvage vehicles from shredders and scrap recyclers, internet-based buyers, and others. Our cost of goods sold also includes labor and other costs we incur to acquire and dismantle such vehicles. Since 2006, our labor and labor-related costs related to acquisition and dismantling have accounted for approximately 7% of our cost of goods sold for vehicles we dismantle. The acquisition and dismantling of salvage vehicles is a manual process and, as a result, energy costs are not material.
Our cost of goods sold for aftermarket products includes the price we pay for the parts, freight, and other inventoried costs such as processing costs incurred in our warehouse locations, allocated overhead and import fees and duties, where applicable. Our aftermarket products are acquired from a number of vendors. Our cost of goods sold for refurbished wheels, bumpers and lights includes the price we pay for inventory, freight, and costs to refurbish the parts, including direct and indirect labor, rent, depreciation and other overhead related to refurbishing operations.
In the event we do not have a recycled OEM product or suitable aftermarket product in our inventory to fill a customer order, we attempt to purchase the part from a competitor. We refer to these parts as brokered products. Since 2006, the revenue from brokered products that we sell to our customers has ranged from 2% to 5% of our total revenue. The gross margin on brokered product sales as a percentage of revenue is generally less than half of what we achieve from sales of our own inventory because we must pay higher prices for these products.
Some of our mechanical products are sold with a standard six-month warranty against defects. We record the estimated warranty costs at the time of sale using historical warranty claim information to project future warranty claims activity and related expenses. We also sell separately priced extended warranty contracts for certain mechanical products. The expense related to extended warranty claims is recognized when the claim is made.
Expenses
Our facility and warehouse expenses primarily include our costs to operate our distribution, self-service, and warehouse facilities. These costs include labor for plant management and facility and warehouse personnel, stock-based compensation, facility rent, property and liability insurance, utilities, and other occupancy costs. The costs included in facility and warehouse expenses do not relate to inventory processing or conversion activities and, as such, are classified below the gross margin line on our consolidated statements of income.
Our distribution expenses primarily include our costs to deliver our products to our customers. Included in our distribution expense category are labor costs for drivers, local delivery and transfer truck rentals and subcontractor costs, vehicle repairs and maintenance, insurance, and fuel.
Our selling and marketing expenses primarily include our advertising, promotion, and marketing costs; salary and commission expenses for sales personnel; sales training; telephone and other communication expenses; and bad debt expense. Since 2006, personnel costs have accounted for approximately 80% of our selling and marketing expenses. Most of our product sales personnel are paid on a commission basis. The number and quality of our sales force is critical to our ability to respond to our customers’ needs and increase our sales volume. Our objective is to continually evaluate our sales force, develop and implement training programs, and utilize appropriate measurements to assess our selling effectiveness.
Our general and administrative expenses include primarily the costs of our corporate and regional offices that provide corporate and field management, treasury, accounting, legal, payroll, business development, human resources, and information systems functions. These costs include wages and benefits for corporate, regional and administrative personnel, stock-based compensation, long term incentive compensation, accounting, legal and other professional fees, office supplies, telephone and other communication costs, insurance and rent.
 
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Seasonality
Our operating results are subject to quarterly variations based on a variety of factors, influenced primarily by seasonal changes in weather patterns. During the winter months we tend to have higher demand for our products because there are more weather related accidents. In addition, the cost of salvage vehicles tends to be lower as more weather related accidents occur generating a larger supply of total loss vehicles.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, assumptions, and judgments, including those related to revenue recognition, inventory valuation, allowance for doubtful accounts, goodwill impairment, self-insurance programs, contingencies, accounting for income taxes, and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities and our recognition of revenue. Actual results may differ from these estimates.
Revenue Recognition
We recognize and report revenue from the sale of vehicle replacement products when they are shipped and title has transferred, subject to a reserve for returns, discounts, and allowances that management estimates based upon historical information. A replacement product would ordinarily be returned within a few days of shipment. Our customers may earn discounts based upon sales volumes or sales volumes coupled with prompt payment. Allowances are normally given within a few days following product shipment. We analyze historical returns and allowances activity by comparing the items to the original invoice amounts and dates. We use this information to project future returns and allowances on products sold. If actual returns and allowances are higher than our historical experience, there would be an adverse impact on our operating results in the period of occurrence.
We also sell separately priced extended warranty contracts for certain mechanical products. Revenue from these contracts is deferred and recognized ratably over the term of the contracts.
Inventory Accounting
Salvage Inventory. Salvage inventory is recorded at the lower of cost or market. Our salvage inventory cost is established based upon the price we pay for a vehicle, and includes buying; dismantling; and, where applicable, auction, storage, and towing fees. Inventory carrying value is determined using the average cost to sales percentage at each of our facilities and applying that percentage to the facility’s inventory at expected selling prices. The average cost to sales percentage is derived from each facility’s historical vehicle profitability for salvage vehicles purchased at auction or from contracted rates for salvage vehicles acquired under direct procurement arrangements.
Aftermarket and Refurbished Product Inventory. Aftermarket and refurbished product inventory is recorded at the lower of cost or market. Our aftermarket inventory cost is based on the average price we pay for parts, and includes expenses incurred for freight and buying, where applicable. For items purchased from foreign sources, import fees and duties and transportation insurance are also included. Our refurbished product inventory cost is based on the average price we pay for wheel and bumper cores, and includes expenses incurred for freight, buying and refurbishing overhead.
 
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For all inventory, our carrying value is reduced regularly to reflect the age and current anticipated demand for our products. If actual demand differs from our estimates, additional reductions to our inventory carrying value would be necessary in the period such determination is made.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts, the aging of the accounts receivable, and our historical experience. Our allowance for doubtful accounts at December 31, 2008 was approximately $5.8 million, which represents 3.6% of gross receivables. If actual defaults are higher than our historical experience, our allowance for doubtful accounts may be insufficient to cover the uncollectible receivables, which would have an adverse impact on our operating results in the period of occurrence. A 10% change in the 2008 annual write-off rate would result in a change in the estimated allowance for doubtful accounts of approximately $0.6 million. For our vehicle replacement parts operations, our exposure to uncollectible accounts receivable is generally limited because the majority of our sales are to a large number of small customers that are geographically dispersed. We also have certain customers in our vehicle replacement parts operations that pay for products at the time of delivery. The aluminum smelter and our mechanical core operation sell in larger quantities to a small number of distributors, foundry customers and remanufacturers. As a result, our exposure to uncollectible accounts receivable is greater in these operations. We control credit risk through credit approvals, credit limits, and monitoring policies.
Goodwill Impairment
We record goodwill as a result of our acquisitions. Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), requires us to test our goodwill for impairment at least annually. The determination of the value of goodwill requires us to make estimates and assumptions that affect our consolidated financial statements. In assessing the recoverability of our goodwill, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. We perform goodwill impairment tests annually in the fourth quarter and between annual tests whenever events may indicate that an impairment exists. In response to changes in industry and market conditions, we may be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill.
During the third quarter of 2008, we commenced a reorganization of our vehicle replacement products operations into 11 operating segments, combining our wholesale recycled OEM products and aftermarket products on a geographic basis, with a separate operating segment for our self-service retail OEM products and one for our recycled heavy truck parts operations. We utilize these 11 operating segments as reporting units, without aggregation, for purposes of goodwill impairment testing. Given the changes to our reporting units, we conducted impairment tests for each unit as of our annual testing date.
Our goodwill would be considered impaired if the net book value of a reporting unit exceeded its estimated fair value. The fair value estimates are established using an equal weighting of the results of a discounted cash flow methodology and a comparative market multiples approach. We believe that using two methods to determine fair value limits the chances of an unrepresentative valuation. As of December 31, 2008, we had $923.8 million in goodwill subject to future impairment tests. If we were required to recognize goodwill impairments, we would report those impairment losses as part of our operating results. We determined that no adjustments were necessary when we performed our annual impairment testing in the fourth quarters of 2008, 2007, and 2006. Furthermore, the sum of the fair values of each of our reporting units was less than our market capitalization at both the annual testing date as well as December 31, 2008. A 10% decrease in the fair value estimates of the reporting units in the fourth quarter of 2008 impairment test would have changed this
 
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determination for one reporting unit. Our self-service reporting unit’s fair value exceeded its book value by 6%. In prior years, the fair value of the self-service reporting unit has exceeded the carrying value by larger amounts. However, a combination of factors, including the decline in scrap metal and other metal prices in the fourth quarter of 2008 and our acquisition of Pick-Your-Part Auto Wrecking (“PYP”) self service yards shortly before this drop in prices, contributed to the narrowing gap between fair value and book value. We could be subject to an impairment in the self-service reporting unit, which has $101.5 million in goodwill as of December 31, 2008, in future periods if the market conditions worsen or the economic slowdown extends into 2010 or later.
Self-Insurance Programs
We self-insure a portion of employee medical benefits under the terms of our employee health insurance program. We purchase certain stop-loss insurance to limit our liability exposure. We also self-insure a portion of our property and casualty risk, which includes automobile liability, general liability, workers’ compensation and property under deductible insurance programs. The insurance premium costs are expensed over the contract periods.
We record an accrual for the claims expense related to our employee medical benefits, automobile liability, general liability, and workers’ compensation claims. The reserve for liabilities associated with these losses is established for claims filed and claims incurred but not yet reported based upon our estimate of ultimate cost, which is calculated using analyses of historical data. We monitor new claims and claim development as well as trends related to the claims incurred but not reported in order to assess the adequacy of our insurance reserves. Our insurance reserves totaled approximately $26.2 million, net of claims deposits of $0.8 million, at December 31, 2008. While we do not expect the amounts ultimately paid to differ significantly from our estimates, our insurance reserves and corresponding expenses could be affected if future claim experience differs significantly from historical trends and assumptions.
Contingencies
We are subject to the possibility of various loss contingencies arising in the ordinary course of business resulting from litigation, claims and other commitments, and from a variety of environmental and pollution control laws and regulations. We consider the likelihood of loss or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. We accrue an estimated loss contingency when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We determine the amount of reserves, if any, with the assistance of our outside legal counsel. We regularly evaluate current information available to us to determine whether the accruals should be adjusted. If the amount of an actual loss were greater than the amount we have accrued, the excess loss would have an adverse impact on our operating results in the period that the loss occurred. If the loss contingency is subsequently determined to no longer be probable, the amount of loss contingency previously accrued would be included in our operating results in the period such determination was made.
Accounting for Income Taxes
All income tax amounts reflect the use of the liability method. Under this method, deferred tax assets and liabilities are determined based upon the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. We operate in multiple tax jurisdictions with different tax rates, and we determine the allocation of income to each of these jurisdictions based upon various estimates and assumptions.
We record a provision for taxes based upon our effective income tax rate. We record a valuation allowance to reduce our deferred tax assets to the amount that we expect is more likely than not to be realized. We consider historical taxable income, expectations, and risks associated with our estimates of future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance. We had a valuation allowance of $0.9 million, $0.7 million, and $0.9 million, at December 31, 2008, 2007, and 2006, respectively, against our
 
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deferred tax assets. Should we determine that it is more likely than not that we would be able to realize all of our deferred tax assets in the future, an adjustment to the net deferred tax asset would increase income in the period such determination was made. Conversely, should we determine that it is more likely than not that we would not be able to realize all of our deferred tax assets in the future, an adjustment to the net deferred tax assets would decrease income in the period such determination was made.
We adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), effective January 1, 2007. FIN 48 establishes a threshold for the financial statement recognition and measurement of tax positions taken or expected to be taken in tax returns. Only those positions that meet the more-likely-than-not recognition threshold may be recognized in the financial statements. We recognize interest accrued relating to unrecognized tax benefits in our income tax expense. As a result of the implementation of FIN 48, we recorded a $0.4 million increase in the liability for unrecognized tax benefits, an increase in deferred tax assets of $0.1 million and a decrease of $0.3 million in the January 1, 2007 retained earnings balance. Prior to 2007, we recorded accruals for tax contingencies and related interest when it was determined that it was probable that we had incurred a liability and the amount could reasonably be estimated based on specific events such as an audit by a taxing authority. In the normal course of business we will undergo tax audits by various tax jurisdictions. Such audits often require an extended period of time to complete and may result in income tax adjustments if changes to the allocation are required between jurisdictions with different tax rates. Under existing GAAP, changes in accruals for uncertainties arising from the resolution of pre-acquisition contingencies of acquired businesses are charged or credited to goodwill. Adjustments to other tax accruals we make are generally recognized in the period they are determined. Under Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), changes in accruals for uncertainties arising from the resolution of pre-acquisition contingencies and income taxes of acquired businesses will be recorded in earnings in the period the changes are determined after the effective date of SFAS 141R. See “Recently Issued Accounting Pronouncements” and Note 12, “Income Taxes” in Item 8 of this Annual Report on Form 10-K for further discussion.
Stock-Based Compensation
We measure compensation cost for all share-based payments (including employee stock options) at fair value and recognize compensation expense for all awards on a straight-line basis over the requisite service period of the award in accordance with SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”).
Several key factors and assumptions affect the valuation models currently utilized for valuing our stock option awards under SFAS 123R. We have been in existence since early 1998 and have been a public company since October 2003. As a result, we do not have the historical data necessary to consider using a lattice valuation model at this time. We have therefore elected to use the Black-Scholes valuation model. In December 2007, the SEC issued Staff Accounting Bulletin 110 (“SAB 110”) to amend the SEC’s views discussed in Staff Accounting Bulletin 107 (“SAB 107”) regarding the use of the simplified method in developing an estimate of expected life of share options in accordance with SFAS No. 123R. We will continue to use the simplified method until we have the historical data necessary to provide a reasonable estimate of expected life in accordance with SAB 107, as amended by SAB 110. For expected term, we have what SAB 107 defines as “plain-vanilla” stock options, and therefore used a simple average of the vesting period and the contractual term for options granted subsequent to January 1, 2006 as permitted by SAB 107. Volatility is a measure of the amount by which our stock price is expected to fluctuate during the expected term of the option. For volatility, we considered our own volatility for the limited time we have been a public company as well as the disclosed volatilities of companies that are considered comparable to us. Our forfeiture assumption is based on historical forfeiture rates both pre-IPO and since we have been a public company. SFAS 123R requires that forfeitures be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The dividend yield represents the dividend rate expected to be paid over the option’s expected term, and we currently have no plans to pay dividends. The risk-free interest rate is based on zero-coupon U.S. government issues available at the time each option is granted that have a remaining life approximately equal to the option’s expected life. Key
 
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weighted-average assumptions used in determining the fair value of stock options granted in 2008 were: expected term of 6.4 years; risk-free interest rate of 3.27%; dividend yield of 0%; forfeiture rate of 6.7%; and volatility of 39.4%.
Recently Issued Accounting Pronouncements
Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) as it pertains to financial assets and liabilities. In accordance with the provisions of FASB Staff Position (“FSP”) 157-2, we elected to defer the adoption of SFAS 157 relating to the fair value of non-financial assets and liabilities. We are currently evaluating the impact, if any, of applying SFAS 157 to our non-financial assets and liabilities. SFAS 157 established a framework for reporting fair value and expands disclosures required for fair value measurements. Although the adoption of SFAS 157 did not have a significant impact on our consolidated financial position, results of operations or cash flows, we are now required to provide additional disclosures as part of our financial statements. These additional disclosures are provided in Note 15, “Fair Value Measurements” in Item 8 of this Annual Report on Form 10-K.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). Under SFAS 141R, companies will be required to, among other things, recognize the assets acquired, liabilities assumed, including contractual contingencies, and contingent consideration at fair value on the date of acquisition. SFAS 141R also requires that acquisition-related expenses be expensed as incurred, restructuring costs be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred income tax asset valuation allowances and acquired income tax uncertainties after the measurement period be expensed in income tax expense. We adopted SFAS 141R on January 1, 2009 and will apply it to business combinations prospectively.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of SFAS No. 133” (“SFAS 161”). SFAS 161 requires enhanced disclosures about derivative and hedging activities and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The disclosure provisions of SFAS 161 are effective as of the beginning of our 2009 fiscal year. As SFAS 161 specifically relates to disclosures regarding derivative and hedging activities, it will not impact our consolidated financial position, results of operations or cash flows.
In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of FSP No. 142-3 on January 1, 2009 did not have an effect on our consolidated financial statements.
Segment Reporting
Over 96% of our operations are conducted in the United States. During 2004, we acquired a recycled OEM products business with locations in Guatemala and Costa Rica. In 2007 and 2008, we acquired a total of four recycled OEM products businesses located in Canada. Keystone, which we acquired in October 2007, has bumper refurbishing operations in Mexico and aftermarket products businesses located in Canada. Revenue generated and properties located outside of the United States are not material.
During the third quarter of 2008, we commenced a reorganization of our vehicle replacement products operations into 11 operating segments, combining our wholesale recycled OEM products and aftermarket products on a geographic basis, with a separate operating segment for our self-service retail OEM products and one for our recycled heavy truck parts operations. These segments are aggregated into one reportable segment
 
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because they possess similar economic characteristics and have common products and services, customers and methods of distribution. The vehicle replacement  products operations account for over 95% of our revenue, earnings and assets.
Results of Operations
The following table sets forth statement of income data as a percentage of total revenue for the periods indicated:

 	  	Year Ended December 31,	 	
 	  	2008	 	 	2007	 	 	2006	 	
Statement of Income Data:	  			 			 			
Revenue	  	100.0	%	 	100.0	%	 	100.0	%	
Cost of goods sold	  	55.8	%	 	55.1	%	 	54.7	%	
Gross margin	  	44.2	%	 	44.9	%	 	45.3	%	
Facility and warehouse expenses	  	9.7	%	 	10.3	%	 	10.9	%	
Distribution expenses	  	9.3	%	 	9.6	%	 	10.1	%	
Selling, general and administrative expenses	  	13.0	%	 	12.5	%	 	12.9	%	
Restructuring expenses	  	0.4	%	 	0.0	%	 	—  	 	
Depreciation and amortization	  	1.6	%	 	1.5	%	 	1.5	%	
Operating income	  	10.2	%	 	10.9	%	 	9.8	%	
Other expense, net	  	1.8	%	 	1.3	%	 	0.6	%	
Income before provision for income taxes	  	8.4	%	 	9.6	%	 	9.2	%	
Net income	  	5.2	%	 	5.8	%	 	5.6	%	
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenue. Our revenue increased 71.9%, from $1,126.8 million in 2007 to $1,937.3 million in 2008. The increase in revenue was primarily due to the higher volume of products we sold and business acquisitions, in particular the Keystone acquisition. We also processed a higher volume of vehicles in 2008, which resulted in higher revenue from processing fees and from the sale of scrap and other commodities derived from the dismantling process. Average scrap metal and other metal prices increased over the prior year, but prices decreased in the latter part of 2008. Since the October 2007 acquisition of Keystone, we have been integrating the sale and distribution of our pre-existing aftermarket, wheel and reconditioned light product offerings with Keystone and with our recycled parts operations in order to provide a wider selection of products to our customers from all distribution points. Organic revenue growth was approximately 8.8% in 2008, and was calculated assuming we had owned Keystone for all of 2007. The integration of our pre-existing aftermarket and wheel operations with Keystone prevents us from measuring revenue growth between Keystone and our pre-existing businesses since the acquisition.
Cost of Goods Sold. Our cost of goods sold increased 74.0%, from $621.1 million in 2007 to $1,080.6 million in 2008. The increase in cost of goods sold was primarily due to increased volume of products sold. As a percentage of revenue, cost of goods sold increased from 55.1% to 55.8%. Our cost of goods sold percentage increased primarily due to lower gross margins at our self service facilities in the latter part of the year. The ferrous and nonferrous metals markets for scrap declined significantly in that time and our margins at the self service facilities suffered as we were forced to sell at lower prices than anticipated when we had acquired the product. While we have adjusted our purchasing to take into account the lower sales pricing for vehicles in our self service retail operations, it normally takes several months to fully adjust our buying costs, and our margins have been hurt as a result. The vehicles we purchase for the self service operations are typically much older and the revenue from scrap is a higher percentage of sales than in our wholesale salvage operation. Additionally, we experienced a difficult buying environment for our self service operations in the fourth quarter, which limited our purchases, as sellers either held vehicles in anticipation of improving conditions or demanded prices above our assessment of the current market value.
 
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Gross Margin. Our gross margin increased 69.4%, from $505.7 million in 2007 to $856.7 million in 2008. Our gross margin increased primarily due to increased volume. As a percentage of revenue, gross margin decreased from 44.9% to 44.2%. Our gross margin as a percentage of revenue decreased due primarily to the factors noted above in Cost of Goods Sold.
Facility and Warehouse Expenses. Facility and warehouse expenses increased 61.0%, from $116.6 million in 2007 to $187.6 million in 2008. Our facility and warehouse expenses increased primarily due to $34.5 million in higher wages and fringe benefits resulting from increased headcount for field personnel, $20.8 million for higher facility rents, taxes and utilities, $4.6 million of higher repairs and maintenance, and $2.9 million of higher supplies expense. Our acquisition of Keystone accounted for a majority of the increase, while our acquisition of PYP in August 2008 contributed $11.3 million to the increase. As a percentage of revenue, facility and warehouse expenses decreased from 10.3% to 9.7%, primarily due to better expense leverage on increased revenue.
Distribution Expenses. Distribution expenses increased 66.4%, from $108.2 million in 2007 to $180.1 million in 2008. Our distribution expenses increased primarily due to $33.7 million of higher wage and benefit costs from an increase in the number of employees, higher fuel costs of $15.7 million, higher truck rentals and repairs of $9.6 million, and higher third party freight of $9.7 million. Our acquisition of Keystone accounted for the majority of the increases. As a percentage of revenue, distribution expenses decreased from 9.6% to 9.3%, primarily due to better expense leverage on increased revenue.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased 78.9%, from $140.8 million in 2007 to $252.0 million in 2008. The majority of the expense increase was a result of an increase in labor and labor-related expenses of $74.1 million due primarily to higher sales commission expenses and increased headcount. Our selling expenses tend to rise as revenue increases due to our commissioned sales forces. Our remaining selling, general and administrative expenses increased due primarily to higher professional fees of $8.8 million, higher telephone expense of $5.4 million, higher bad debt expense of $4.4 million, higher advertising and promotion of $5.0 million, and higher employee travel expenses of $3.9 million. Our acquisition of Keystone accounted for a majority of the increases. As a percentage of revenue, selling, general and administrative expenses increased from 12.5% to 13.0%. Aftermarket products, which became a larger portion of our business with the Keystone acquisition, have higher selling costs as a percentage of revenue than our recycled products.
Restructuring Expenses. Restructuring expenses increased from $0.4 million in 2007 to $8.6 million in 2008. Restructuring expenses include facility and personnel relocation costs, severance, and lease termination costs that we incurred when we combined some of our existing facilities into Keystone facilities. We completed the acquisition of Keystone on October 12, 2007. As of December 31, 2008, we have completed the majority of our facility and systems conversions. We currently anticipate the combination of operations and migration of systems will be substantially completed during the second quarter of 2009.
Depreciation and Amortization. Depreciation and amortization increased 79.5%, from $17.1 million in 2007 to $30.7 million in 2008. Our acquisition of Keystone accounted for the majority of the increase in depreciation and amortization expense, including $3.0 million of higher amortization for the Keystone trade name. As a percentage of revenue, depreciation and amortization increased from 1.5% in 2007 to 1.6% in 2008.
Operating Income. Operating income increased 61.2% from $122.7 million in 2007 to $197.7 million in 2008. As a percentage of revenue, operating income decreased from 10.9% to 10.2%.
Other (Income) Expense. Net other expense increased 137.1% from $14.4 million in 2007 to $34.1 million in 2008. Net interest expense increased 121.9% to $35.5 million in 2008 from $16.0 million in 2007. Our average bank borrowings increased approximately $410.5 million during 2008 as compared to 2007, due primarily to the Keystone acquisition. We had $0.9 million of proceeds from corporate owned life insurance in 2007. We use
 
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corporate owned life insurance policies to fund our obligations under our nonqualified deferred compensation plan. As a percentage of revenue, net other expense increased from 1.3% in 2007 to 1.8% in 2008, due primarily to higher interest expense.
Provision for Income Taxes. The provision for income taxes increased 50.3%, from $42.4 million in 2007 to $63.7 million in 2008, due primarily to improved operating results. Our effective tax rate was 38.9% in 2008 and 39.1% in 2007. We experienced an increase in our effective state tax rate of 0.4% compared to the prior year as a result of the Keystone acquisition, which affected the apportionment of our state income towards higher rate jurisdictions. Discrete items decreased the effective rate in 2008 as opposed to increasing the effective rate in 2007. In 2008, we identified several state tax credits for which we were eligible and recognized a tax benefit of approximately $1.2 million in our income tax provision for 2008. Provisions for uncertain tax positions increased relative to the prior year, primarily as a result of Keystone tax reserves. In 2007, we reduced certain deferred tax assets and net income by $0.6 million due to a change in a state’s income tax law where we have operations, which increased our effective rate by 0.5%. This effect was partially offset by the benefit from $0.9 million of non-taxable life insurance proceeds from corporate owned life insurance. 
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenue. Our revenue increased 42.7%, from $789.4 million in 2006 to $1,126.8 million in 2007. The increase in revenue was primarily due to the higher volume of products we sold and business acquisitions. Organic revenue growth was approximately 12.4% in 2007. We continued to expand our services to the insured repair industry and added local delivery routes and transfer routes that helped us to increase our market penetration. We also continued to integrate the sale and distribution of our aftermarket, wheel and refurbished light vehicle replacement product offerings with our recycled OEM products in more locations in order to provide a wider selection of products to our customers. Business acquisitions completed in 2007 (including Keystone since the closing of that transaction on October 12, 2007) and the full year impact of our 2006 acquisitions accounted for approximately $239.6 million of incremental revenue for the year.
Cost of Goods Sold. Our cost of goods sold increased 43.8%, from $431.8 million in 2006 to $621.1 million in 2007. As a percentage of revenue, cost of goods sold increased from 54.7% to 55.1%. The increase in cost of goods sold was primarily due to increased volume of products sold. Our cost of goods sold percentage increased primarily due to the lower gross margin of our aluminum smelter and purchase accounting inventory adjustments as described below relating to SFAS 141. This smelter had revenue of $38.4 million at a gross margin of 4.8% in 2007, compared to $28.2 million at a gross margin of 7.1% during 2006. We were also required to write-up the value of Keystone’s finished goods and work in process inventories for refurbished products in accordance with SFAS 141. As a result, we recorded an additional $1.8 million in cost of goods sold for the period we owned Keystone in 2007. We will record an additional $1.1 million of cost of goods sold in the first quarter of 2008 related to this SFAS 141 write-up.
Gross Margin. Our gross margin increased 41.4%, from $357.5 million in 2006 to $505.7 million in 2007. Our gross margin increased primarily due to increased volume. As a percentage of revenue, gross margin decreased from 45.3% to 44.9%. Our gross margin as a percentage of revenue decreased due primarily to the factors noted above in Cost of Goods Sold.
Facility and Warehouse Expenses. Facility and warehouse expenses increased 35.1%, from $86.3 million in 2006 to $116.6 million in 2007. Our acquisitions accounted for $24.0 million of the increase. Our remaining facility and warehouse expenses increased primarily due to $4.4 million of higher wages and fringe benefits resulting from an increase in the number of employees necessary to handle higher parts volume. The balance of the increase is primarily related to the higher cost of rent, repairs and maintenance, and supplies. As a percentage of revenue, facility and warehouse expenses decreased from 10.9% to 10.3%, primarily due to expense leverage on increased revenue.
 
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Distribution Expenses. Distribution expenses increased 35.1%, from $80.1 million in 2006 to $108.2 million in 2007. Our acquisitions accounted for $20.3 million of the increase. Our remaining distribution expenses increased primarily due to $4.1 million of higher wages and fringe benefits from an increase in the number of employees to handle higher parts volumes, increased fuel costs of $1.8 million and higher freight, repairs and rental costs. As a percentage of revenue, distribution expenses decreased from 10.1% to 9.6%, primarily due to expense leverage on increased revenue.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased 37.8%, from $102.2 million in 2006 to $140.8 million in 2007. Our acquisitions accounted for $32.7 million of the increase. The remaining increase in our selling, general and administrative expenses is due to higher compensation and fringe benefits costs. As a percentage of revenue, selling, general and administrative expenses decreased from 12.9% to 12.5%, primarily due to expense leverage on increased revenue.
Restructuring Expenses. Restructuring expenses totaled $0.4 million in 2007. Restructuring expenses include severance and lease termination costs that we incurred when we combined some of our existing facilities into Keystone facilities.
Depreciation and Amortization. Depreciation and amortization increased 44.6%, from $11.8 million in 2006 to $17.1 million in 2007. Our acquisitions accounted for $3.6 million of the increase in depreciation and amortization. As a percentage of revenue, depreciation and amortization was 1.5% in both 2006 and 2007.
Operating Income. Operating income increased 59.0% from $77.2 million in 2006 to $122.7 million in 2007. As a percentage of revenue, operating income increased from 9.8% to 10.9%.
Other (Income) Expense. Net other expense increased 231.1% from $4.3 million in 2006 to $14.4 million in 2007. Net interest expense increased 174.9% to $16.0 million in 2007 from $5.8 million in 2006. Our average bank borrowings increased approximately $152.3 million during 2007 as compared to 2006, due primarily to the Keystone acquisition. In addition, our average effective interest rate on our bank debt also increased in 2007. We had $0.9 million of proceeds from corporate owned life insurance in 2007. We use corporate owned life insurance policies to fund our obligations under our nonqualified deferred compensation plan. Included in other income in 2006 is a gain of $0.7 million on the sale of equity securities. As a percentage of revenue, net other expense increased from 0.6% in 2006 to 1.3% in 2007, due primarily to higher interest expense.
Provision for Income Taxes. The provision for income taxes increased 49.1%, from $28.4 million in 2006 to $42.4 million in 2007, due primarily to improved operating results. Our effective tax rate was 39.1% in 2007 and 39.0% in 2006. Our effective tax rate in 2007 was impacted by several items. We had $0.9 million of non-taxable life insurance proceeds from corporate owned life insurance. In addition, we reduced certain deferred tax assets and net income by $0.6 million due to a change in a state’s income tax law where we have operations. We also were able to utilize certain state tax net operating loss carry forwards that we did not expect would be realized and adjusted tax reserves due to  the statutory closing of certain tax years. Without all of these adjustments the effective tax rate would have been 40.0%.
Liquidity and Capital Resources
Our primary sources of ongoing liquidity are cash flow from our operations and our credit facility. At December 31, 2008, we had $79.1 million in cash and cash equivalents and approximately $71.4 available under our bank credit agreement ($115 million commitment less outstanding revolver borrowings of $5.3 million and letters of credit of $23.2 million, and excluding a $15 million commitment from Lehman Commercial Paper Inc. (“LCP”) that is unlikely to be honored, as described below). On September 25, 2007, we completed a public offering of 27.6 million shares of our common stock, with 23.6 million shares sold by us and 4.0 million shares sold by certain selling stockholders. We received approximately $349.5 million in net proceeds from the offering, after deducting underwriting discounts and expenses of the offering. We paid all amounts outstanding under our
 
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revolving credit facility at that time and temporarily invested the remaining proceeds in cash equivalents until we used the proceeds to acquire Keystone on October 12, 2007.
We obtained a senior secured debt financing facility (“Credit Agreement”) from Lehman Brothers Inc. (“Lehman”) and Deutsche Bank Securities, Inc. (“Deutsche Bank”) on October 12, 2007, which was amended on October 26, 2007. The Credit Agreement has a six year term and includes a $610 million term loan, a $40 million Canadian currency term loan, a $100 million U.S. dollar revolving credit facility, and a $15 million dual currency facility for drawings of either U.S. dollars or Canadian dollars. The Credit Agreement also provides for (i) the issuance of letters of credit of up to $35 million in U.S. dollars and up to $10 million in either U.S. or Canadian dollars, (ii) for a swing line credit facility of $25 million under the $100 million revolving credit facility, and (iii) the opportunity for us to add additional term loan facilities and/or increase the $100 million revolving credit facility’s commitments, provided that such additions or increases do not exceed $150 million in the aggregate and provided further that no existing lender is required to make its pro rata share of any such additions or increases without its consent. Amounts under each term loan facility are due and payable in quarterly installments of increasing amounts that began in the first quarter of 2008, with the balance payable in full on October 12, 2013. Amounts due under each revolving credit facility will be due and payable on October 12, 2013. We are also required to prepay the term loan facilities upon the sale of certain assets, upon the incurrence of certain debt, upon receipt of certain insurance and condemnation proceeds, and with up to 50% of our excess cash flow, with the amount of such excess cash flow determined based upon our total leverage ratio.
LCP filed for protection under Chapter 11 of the Federal Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York on October 5, 2008. LCP is the administrative agent under our Credit Agreement and had committed to provide $15 million under the revolving credit facility that is a part of our Credit Agreement. Our ability to draw on that $15 million is doubtful as a result of the bankruptcy filing. LCP is also our swing line lender and in such capacity had committed to provide same day borrowing of swing line loans as part of our revolving credit facility. We have not borrowed any amounts under any swing line loans. Our ability to access this short term borrowing is doubtful as a result of the bankruptcy filing. However, we do not believe that any inability to draw on the $15 million revolving credit facility or to access our swing line facility will have a material adverse impact on us.
The Credit Agreement contains customary representations and warranties, and contains customary covenants that restrict our ability to, among other things (i) incur liens, (ii) incur any indebtedness (including guarantees or other contingent obligations), and (iii) engage in mergers and consolidations. The Credit Agreement also requires us to meet certain financial covenants, including compliance with the required senior secured debt ratio. We were in compliance with all restrictive covenants as of December 31, 2008.
Borrowings under the Credit Agreement accrue interest at variable rates, which depend on the type (U.S. dollar or Canadian dollar) and duration of the borrowing, plus an applicable margin rate. The weighted-average interest rates on borrowings outstanding against our senior secured credit facility at December 31, 2008 (after giving effect to the interest rate swap contracts in force, described in Note 5, “Long-Term Obligations,” in Item 8 of this Annual Report on Form 10-K) and 2007 were 4.62% and 7.53%, respectively, before debt issuance cost amortization. Borrowings against the senior secured credit facility totaled $638.3 million and $650.3 million at December 31, 2008 and 2007, respectively, of which $19.8 million and $10.0 million are classified as current maturities, respectively.
Our liquidity needs are primarily to fund working capital requirements and expand our facilities and network. The procurement of inventory is the largest operating use of our funds. We normally pay for salvage vehicles acquired at salvage auctions and under some direct procurement arrangements at the time that we take possession of the vehicles. We normally pay for aftermarket parts purchases at the time of shipment or on standard payment terms, depending on the manufacturer and payment options offered. Wheel cores acquired from third parties are normally paid for on standard payment terms. We acquired approximately 144,500, 126,000 and 111,400 wholesale salvage vehicles in 2008, 2007 and 2006, respectively. In addition, we acquired
 
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approximately 297,000, 197,500 and 138,700 lower cost self-service and crush only vehicles in 2008, 2007 and 2006, respectively. Our purchases of aftermarket parts and wheels totaled approximately $490.4 million, $190.1 million and $94.5 million in 2008, 2007 and 2006, respectively, with the increase principally due to our acquisition of Keystone.
Net cash provided by operating activities totaled $133.0 million for the year ended December 31, 2008, compared to $54.4 million for the same period of 2007. Net income adjusted for non-cash depreciation, amortization and stock-based compensation generated $141.2 million of cash in 2008, a $53.8 million increase over the same period of 2007. Working capital uses of cash, net of effects of purchase acquisitions, included increases in receivables and decreases in accounts payable and other accrued expenses. Receivables increased primarily due to a growth in revenue. Accounts payable decreased primarily due to accelerating some of Keystone’s vendor payments in order to take advantage of discounts offered for earlier payment. Inventory, net of effects of purchase acquisitions, generated a cash inflow of $4.2 million for 2008, compared to a $35.1 million outflow in the prior year. The reduction in the inventory balance is attributable to a decline in aftermarket inventory resulting from the consolidation of LKQ’s former aftermarket operations with Keystone’s. Additionally, we experienced a difficult buying environment for our self service operations in the fourth quarter, which limited our purchases, as sellers either held vehicles in anticipation of improving conditions or demanded prices above our assessment of the current market value.
Net cash used in investing activities totaled $138.9 million for the year ended December 31, 2008, compared to $905.8 million for the same period of 2007. We invested $74.2 million of cash in eight acquisitions in 2008 compared to $868.0 million for 12 acquisitions in the comparable period of 2007, including the acquisition of Keystone for cash consideration of approximately $807 million. Net property and equipment and other long term asset purchases increased $26.9 million in 2008, which is partially attributable to a full year of capital spending for Keystone compared to less than three months in 2007. Additionally, we continued spending to expand our salvage facilities and develop our operating systems.
Net cash provided by financing activities totaled $11.8 million for the year ended December 31, 2008, compared to $921.6 million for the same period of 2007, which resulted primarily from the term loan borrowings in October 2007 and the sale of common stock in September 2007. Exercises of stock options provided $10.4 million and $12.1 million in the years ended December 31, 2008 and 2007, respectively. The excess tax benefit from share-based payment arrangements reduced income taxes payable by $12.5 million and $19.3 million in the years ended December 31, 2008 and 2007, respectively. Net repayments of long-term debt obligations and line of credit borrowings totaled $10.9 million in 2008 while net borrowings were $554.7 million in 2007, primarily resulting from term loan borrowings of $651.0 million for the Keystone acquisition.
Net cash provided by operating activities totaled $54.4 million in 2007, compared to $52.4 million in 2006. Cash was provided by net income adjusted for non-cash items. Working capital uses of cash included increases in receivables and inventory, partially offset by increases in payables, accruals, income taxes and other noncurrent liabilities. Receivables increased primarily due to our increased sales volumes. Inventory increased to support our increased sales volume and to increase availability of our recycled OEM products. Accounts payable and accrued expenses increased primarily due to our increased volume and restructuring costs. Income taxes, before considering the excess tax benefit from the exercise of stock options, increased due to the timing of tax payments. Other noncurrent liabilities increased primarily due to increases in our long term incentive plan and deferred compensation liabilities.
Net cash used in investing activities totaled $905.8 million in 2007, compared to $110.7 million in 2006. We used $868.0 million of cash for acquisitions in 2007, with $806.8 million used for the Keystone acquisition, compared to $73.5 million used for acquisitions in 2006. Our net property and equipment purchases increased $1.9 million in 2007. In 2006, we repaid $2.6 million from escrow liabilities related to a 2004 acquisition.
 
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Net cash provided by financing activities totaled $921.6 million in 2007, compared to $59.1 million in 2006. As described below, we received $349.5 million from the sale of 23.6 million shares of our common stock in a public offering in 2007. We also borrowed $651.0 million under our term loan to finance the Keystone acquisition in 2007. Exercises of stock options totaled $12.1 million in 2007 compared to $5.5 million in 2006, while the excess tax benefit from such option exercises was $19.3 million in 2007 and $7.1 million in 2006. We exercised a call option and retired $1.1 million of redeemable common stock in 2007. In connection with our debt refinancing, we paid $12.8 million in debt issuance costs in 2007. We repaid $88.2 million in 2007 under our previous revolving credit facility compared to net borrowings of $48.0 million in 2006. Repayments of long-term obligations increased $5.9 million in 2007.
As part of the consideration for business acquisitions completed during 2008, 2007 and 2006, we issued promissory notes totaling approximately $1.6 million, $1.7 million and $7.2 million, respectively. The notes bear interest at annual rates of 3.5% to 6.0%, and interest is payable at maturity or in monthly installments.
We intend to continue to evaluate markets for potential growth through the internal development of redistribution centers, processing facilities, and warehouses, through further integration of aftermarket, refurbished and recycled OEM product facilities, and through selected business acquisitions. Our future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of our internal development efforts and the success of those efforts, the costs and timing of expansion of our sales and marketing activities, and the costs and timing of future business acquisitions.
We estimate that our capital expenditures for 2009, excluding business acquisitions, will be between $75.0 and $80.0 million. We expect to use these funds for several major facility expansions, improvement of current facilities, real estate acquisitions and systems development projects. We anticipate that net cash provided by operating activities for 2009 will be in excess of $145.0 million.
We believe that our current cash and equivalents, cash provided by operating activities and funds available under our credit facility will be sufficient to meet our current operating and capital requirements. However, we may, from time to time, raise additional funds through public or private financing, strategic relationships, or other arrangements. There can be no assurance that additional funding, or refinancing of our credit facility, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital if and when needed could have a material adverse impact on our business, operating results, and financial condition.
Off-Balance Sheet Arrangements and Future Commitments
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt that would be required to be disclosed pursuant to Item 303 of Regulation S-K under the Securities Exchange Act of 1934. Additionally, we do not have any synthetic leases.
 
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The following table represents our future commitments under contractual obligations as of December 31, 2008:

 	  	Total	  	Less than
1 Year	  	1-3 Years	  	3-5 Years	  	More than
5 Years	
 	  	(In millions)	
Contractual obligations	  			  			  			  			  			
Long-term debt	  	$	800.5	  	$	51.3	  	$	137.8	  	$	610.8	  	$	0.6	
Operating leases	  	 	220.9	  	 	48.0	  	 	72.7	  	 	46.9	  	 	53.3	
Outstanding letters of credit	  	 	23.2	  	 	8.4	  	 	14.8	  	 	0.0	  	 	0.0	
Purchase obligations	  	 	29.1	  	 	26.1	  	 	0.0	  	 	0.0	  	 	3.0	
Other long-term obligations	  			  			  			  			  			
Deferred compensation plans	  	 	3.7	  	 	0.0	  	 	0.0	  	 	0.0	  	 	3.7	
Long term incentive plan	  	 	5.0	  	 	3.4	  	 	1.6	  	 	0.0	  	 	0.0	
Pension and postretirement benefits	  	 	1.5	  	 	0.7	  	 	0.1	  	 	0.1	  	 	0.6	
FIN 48 liability	  	 	7.9	  	 	0.8	  	 	5.4	  	 	1.1	  	 	0.6	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total	  	$	1,091.8	  	$	138.7	  	$	232.4	  	$	658.9	  	$	61.8	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Our long-term debt under contractual obligations above includes interest on the balance outstanding under our variable rate credit facility as of December 31, 2008. The long term debt outstanding at December 31, 2008 in the above table includes interest computed at the average effective rate of 4.62% at December 31, 2008.
 
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ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	
Our results of operations are exposed to changes in interest rates primarily with respect to borrowings under our credit facility, where interest rates are tied to either the prime rate or LIBOR. In March 2008, we implemented a policy to manage our exposure to variable interest rates on a portion of our outstanding variable rate debt instruments through the use of interest rate swap contracts. These contracts convert a portion of our variable rate debt to fixed rate, matching effective and maturity dates to specific debt instruments. All of our interest rate swap contracts have been executed with banks (JP Morgan Chase Bank, N.A. and Deutsche Bank AG) that we believe are creditworthy and are denominated in currency that matches the underlying debt instrument. Net interest payments or receipts from interest rate swap contracts will be included as adjustments to interest expense in our consolidated income statement. As of December 31, 2008, three interest rate swap contracts representing a total of $500 million of notional amount were outstanding with various maturity dates through April 2011. All of these contracts are designated as cash flow hedges and modify the variable rate nature of that portion of our variable rate debt. The fair market value of our outstanding interest rate swap contracts at December 31, 2008 was a liability of approximately $14.5 million, and the value of such contracts is subject to changes in interest rates.
At December 31, 2008, we had unhedged variable rate debt of $138.3 million. Using sensitivity analysis to measure the impact of a 100 basis point movement in the interest rate, interest expense would change by $1.4 million annually.
We are also exposed to market risk related to price fluctuations in scrap metal and other metals. Market prices of these metals affect the amount that we pay for our inventory as well as the revenue that we generate from sales of these metals. As both our revenue and costs are affected by the price fluctuations, we have a natural hedge against the changes. However, there is typically a lag between the metal price fluctuations, which influence our revenue, and any inventory cost changes. Therefore, we can experience positive or negative margin effects in periods of rising or falling metal prices, particularly when such prices move rapidly. Scrap metal and other metal prices declined significantly in the fourth quarter of 2008, which had a negative effect on our revenue and margins. This trend will continue until inventory costs decrease by an amount commensurate with the decline of scrap metal and other metal prices.
Additionally, we are exposed to currency fluctuations with respect to the purchase of aftermarket parts in Taiwan. While all transactions with manufacturers based in Taiwan are conducted in U.S. dollars, changes in the relationship between the U.S. dollar and the Taiwan dollar might impact the purchase price of aftermarket parts. We might not be able to pass on any price increases to customers. Under our present policies, we do not attempt to hedge this currency exchange rate exposure.
Our investment in our operations in Central America and Canada is not material, and we do not attempt to hedge our foreign currency risk related to such operations.
 
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 ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	
*****
INDEX TO FINANCIAL STATEMENTS

 	  	Page	
LKQ CORPORATION AND SUBSIDIARIES	  		
Report of Independent Registered Public Accounting Firm	  	45	
Consolidated Balance Sheets as of December 31, 2008 and 2007	  	46	
Consolidated Statements of Income for the years ended December 31, 2008, 2007, and 2006	  	47	
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007, and 2006	  	48	
Consolidated Statements of Stockholders’ Equity and Other Comprehensive Income for the years ended December  31, 2008, 2007, and 2006	  	49	
Notes to Consolidated Financial Statements	  	51	
 
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 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of LKQ Corporation:
We have audited the accompanying consolidated balance sheets of LKQ Corporation and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity and other comprehensive income, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of LKQ Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2, effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Tax—an Interpretation of Financial Accounting Standards Board Statement No. 109 .
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2009 expressed an unqualified opinion on the Company’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 26, 2009
 
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LKQ CORPORATION AND SUBSIDIARIES
 Consolidated Balance Sheets
(In thousands, except share and per share data)

 	  	December 31,	
 	  	2008	 	 	2007	
Assets	  				 			
Current Assets:	  				 			
Cash and equivalents	  	$	79,067	 	 	$	74,241	
Receivables, net	  	 	148,422	 	 	 	125,572	
Inventory	  	 	332,756	 	 	 	320,238	
Deferred income taxes	  	 	19,644	 	 	 	18,809	
Prepaid income taxes	  	 	21,164	 	 	 	6,344	
Prepaid expenses	  	 	7,865	 	 	 	8,088	
	  	 	 	 	 	 	 	
Total Current Assets	  	 	608,918	 	 	 	553,292	
Property and Equipment, net	  	 	258,956	 	 	 	217,059	
Intangible Assets	  				 			
Goodwill	  	 	923,807	 	 	 	825,881	
Other intangible assets, net	  	 	71,150	 	 	 	74,951	
Other Assets	  	 	18,973	 	 	 	21,472	
	  	 	 	 	 	 	 	
Total Assets	  	$	1,881,804	 	 	$	1,692,655	
	  	 	 	 	 	 	 	
Liabilities and Stockholders’ Equity	  				 			
Current Liabilities:	  				 			
Accounts payable	  	$	65,411	 	 	$	68,871	
Accrued expenses	  				 			
Accrued payroll-related liabilities	  	 	33,129	 	 	 	27,542	
Other accrued expenses	  	 	42,006	 	 	 	45,630	
Deferred revenue	  	 	4,733	 	 	 	4,844	
Current portion of long-term obligations	  	 	21,934	 	 	 	16,936	
	  	 	 	 	 	 	 	
Total Current Liabilities	  	 	167,213	 	 	 	163,823	
Long-Term Obligations, Excluding Current Portion	  	 	620,940	 	 	 	641,526	
Deferred Income Tax Liability	  	 	43,518	 	 	 	25,607	
Other Noncurrent Liabilities	  	 	29,627	 	 	 	11,922	
Commitments and Contingencies	  				 			
Stockholders’ Equity:	  				 			
Common stock, $0.01 par value, 500,000,000 shares authorized, 139,921,410 and 134,149,066 shares issued and outstanding at December 31, 2008 and 2007, respectively.	  	 	1,399	 	 	 	1,341	
Additional paid-in capital	  	 	790,933	 	 	 	705,778	
Retained earnings	  	 	241,938	 	 	 	142,039	
Accumulated other comprehensive income (loss)	  	 	(13,764	)	 	 	619	
	  	 	 	 	 	 	 	
Total Stockholders’ Equity	  	 	1,020,506	 	 	 	849,777	
	  	 	 	 	 	 	 	
Total Liabilities and Stockholders’ Equity	  	$	1,881,804	 	 	$	1,692,655	
	  	 	 	 	 	 	 	
The accompanying notes are an integral part of the consolidated financial statements.
 
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LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Inc  ome
(In thousands, except per share data)

 	  	Year Ended December 31,	 	
 	  	2008	 	 	2007	 	 	2006	 	
Revenue	  	$	1,937,301	 	 	$	1,126,825	 	 	$	789,381	 	
Cost of goods sold	  	 	1,080,632	 	 	 	621,076	 	 	 	431,832	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Gross margin	  	 	856,669	 	 	 	505,749	 	 	 	357,549	 	
Facility and warehouse expenses	  	 	187,645	 	 	 	116,577	 	 	 	86,298	 	
Distribution expenses	  	 	180,063	 	 	 	108,185	 	 	 	80,088	 	
Selling, general and administrative expenses	  	 	251,982	 	 	 	140,843	 	 	 	102,174	 	
Restructuring expenses	  	 	8,589	 	 	 	388	 	 	 	—  	 	
Depreciation and amortization	  	 	30,694	 	 	 	17,099	 	 	 	11,823	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Operating income	  	 	197,696	 	 	 	122,657	 	 	 	77,166	 	
Other (income) expense:	  				 				 				
Interest expense	  	 	37,846	 	 	 	17,758	 	 	 	5,955	 	
Interest income	  	 	(2,309	)	 	 	(1,746	)	 	 	(131	)	
Other income, net	  	 	(1,429	)	 	 	(1,626	)	 	 	(1,479	)	
	  	 	 	 	 	 	 	 	 	 	 	 	
Total other expense	  	 	34,108	 	 	 	14,386	 	 	 	4,345	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Income before provision for income taxes	  	 	163,588	 	 	 	108,271	 	 	 	72,821	 	
Provision for income taxes	  	 	63,689	 	 	 	42,370	 	 	 	28,426	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	99,899	 	 	$	65,901	 	 	$	44,395	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net income per share:	  				 				 				
Basic	  	$	0.73	 	 	$	0.58	 	 	$	0.42	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Diluted	  	$	0.71	 	 	$	0.55	 	 	$	0.40	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
The accompanying notes are an integral part of the consolidated financial statements.
 
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 LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)

 	  	Year Ended December 31,	 	
 	  	2008	 	 	2007	 	 	2006	 	
CASH FLOWS FROM OPERATING ACTIVITIES:	  				 				 				
Net income	  	$	99,899	 	 	$	65,901	 	 	$	44,395	 	
Adjustments to reconcile net income to net cash provided by operating activities:	  				 				 				
Depreciation and amortization	  	 	33,421	 	 	 	18,018	 	 	 	12,086	 	
Loss (gain) on sale of property and equipment	  	 	943	 	 	 	(138	)	 	 	(20	)	
Stock-based compensation expense	  	 	5,498	 	 	 	3,039	 	 	 	2,461	 	
Amortization of debt issuance costs	  	 	2,409	 	 	 	424	 	 	 	—  	 	
Deferred income taxes	  	 	13,535	 	 	 	4,304	 	 	 	3,618	 	
Gain on sale of investment securities	  	 	—  	 	 	 	—  	 	 	 	(719	)	
Excess tax benefit from exercise of stock options	  	 	(12,547	)	 	 	(19,257	)	 	 	(7,101	)	
Changes in operating assets and liabilities, net of effects from purchase transactions:	  				 				 				
Receivables	  	 	(15,026	)	 	 	(11,026	)	 	 	(4,133	)	
Inventory	  	 	4,232	 	 	 	(35,134	)	 	 	(8,671	)	
Prepaid expenses and other assets	  	 	1,241	 	 	 	261	 	 	 	(1,242	)	
Accounts payable	  	 	(4,785	)	 	 	6,877	 	 	 	(2,469	)	
Accrued expenses	  	 	(6,175	)	 	 	121	 	 	 	4,052	 	
Prepaid income taxes/income taxes payable	  	 	8,960	 	 	 	17,000	 	 	 	7,071	 	
Deferred revenue	  	 	(113	)	 	 	979	 	 	 	224	 	
Other noncurrent liabilities	  	 	1,469	 	 	 	3,000	 	 	 	2,829	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided by operating activities	  	 	132,961	 	 	 	54,369	 	 	 	52,381	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
CASH FLOWS FROM INVESTING ACTIVITIES:	  				 				 				
Purchases of property and equipment	  	 	(66,908	)	 	 	(38,401	)	 	 	(36,152	)	
Proceeds from sale of property and equipment	  	 	2,206	 	 	 	602	 	 	 	250	 	
Proceeds from sale of investment securities	  	 	—  	 	 	 	—  	 	 	 	848	 	
Repayment of escrow	  	 	—  	 	 	 	—  	 	 	 	(2,561	)	
Decrease in restricted cash in escrow	  	 	—  	 	 	 	—  	 	 	 	450	 	
Cash used in acquisitions	  	 	(74,208	)	 	 	(868,022	)	 	 	(73,492	)	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net cash used in investing activities	  	 	(138,910	)	 	 	(905,821	)	 	 	(110,657	)	
	  	 	 	 	 	 	 	 	 	 	 	 	
CASH FLOWS FROM FINANCING ACTIVITIES:	  				 				 				
Proceeds from the sale of common stock	  	 	—  	 	 	 	349,529	 	 	 	—  	 	
Proceeds from exercise of stock options	  	 	10,402	 	 	 	12,080	 	 	 	5,477	 	
Retirement of redeemable common stock	  	 	—  	 	 	 	(1,125	)	 	 	—  	 	
Proceeds from exercise of warrants	  	 	—  	 	 	 	—  	 	 	 	785	 	
Excess tax benefit from exercise of stock options	  	 	12,547	 	 	 	19,257	 	 	 	7,101	 	
Debt issuance costs	  	 	(219	)	 	 	(12,832	)	 	 	—  	 	
Net borrowings (repayments) under line of credit	  	 	5,271	 	 	 	(88,170	)	 	 	48,000	 	
(Repayments) borrowings under term loans	  	 	(9,957	)	 	 	650,984	 	 	 	—  	 	
Repayments of long-term debt obligations	  	 	(6,251	)	 	 	(8,094	)	 	 	(2,229	)	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided by financing activities	  	 	11,793	 	 	 	921,629	 	 	 	59,134	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Effect of exchange rate changes on cash and equivalents	  	 	(1,018	)	 	 	33	 	 	 	—  	 	
Net increase in cash and equivalents	  	 	4,826	 	 	 	70,210	 	 	 	858	 	
Cash and equivalents, beginning of period	  	 	74,241	 	 	 	4,031	 	 	 	3,173	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Cash and equivalents, end of period	  	$	79,067	 	 	$	74,241	 	 	$	4,031	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Supplemental disclosure of cash flow information:	  				 				 				
Notes issued in connection with business acquisitions	  	$	1,573	 	 	$	1,699	 	 	$	7,200	 	
Notes assumed in connection with business acquisitions	  	 	267	 	 	 	118	 	 	 	—  	 	
Stock issued in connection with business acquisitions	  	 	60,041	 	 	 	—  	 	 	 	—  	 	
Cash paid for income taxes, net of refunds	  	 	39,171	 	 	 	21,371	 	 	 	18,125	 	
Cash paid for interest	  	 	35,864	 	 	 	13,898	 	 	 	4,278	 	
Property and equipment acquired under capital leases	  	 	746	 	 	 	—  	 	 	 	—  	 	
The accompanying notes are an integral part of the consolidated financial statements.
 
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 LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Other Comprehensive Income
(In thousands)

 	 	Common Stock	 	Additional
Paid-In
Capital	 	 	 	 	 	 	 	 	Accumulated
Other
Comprehensive
Income (Loss)	 	 	Total
Stockholders’
Equity	 	
 	 	Shares
Issued	 	Amount	 			 	Warrants	 	 	Retained
Earnings	 	 			 			
BALANCE, January 1, 2006	 	102,828	 	$	1,028	 	$	306,790	 	 	$	80	 	 	$	32,027	 	 	$	1,295	 	 	$	341,220	 	
Net income	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	44,395	 	 	 	—  	 	 	 	44,395	 	
Unrealized loss on investment in equity securities, net of tax	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(214	)	 	 	(214	)	
Foreign currency translation	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(23	)	 	 	(23	)	
	 		 			 				 				 				 				 	 	 	 	
Total comprehensive income	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	44,158	 	
Stock issued as director compensation	 	8	 	 	—  	 	 	72	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	72	 	
Stock-based compensation expense	 	—  	 	 	—  	 	 	2,389	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	2,389	 	
Exercise of stockholder guarantor warrants	 	1,570	 	 	16	 	 	849	 	 	 	(80	)	 	 	—  	 	 	 	—  	 	 	 	785	 	
Exercise of stock options, including related tax benefits of $7,101	 	2,194	 	 	22	 	 	12,556	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	12,578	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
BALANCE, December 31, 2006	 	106,600	 	$	1,066	 	$	322,656	 	 	$	—  	 	 	$	76,422	 	 	$	1,058	 	 	$	401,202	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Adjustment for adoption of FIN 48	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	(284	)	 	 	—  	 	 	 	(284	)	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
BALANCE, January 1, 2007	 	106,600	 	$	1,066	 	$	322,656	 	 	$	—  	 	 	$	76,138	 	 	$	1,058	 	 	$	400,918	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	65,901	 	 	 	—  	 	 	 	65,901	 	
Reversal of unrealized gain on investment in equity securities, net of tax	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(1,137	)	 	 	(1,137	)	
Foreign currency translation	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	698	 	 	 	698	 	
	 		 			 				 				 				 				 	 	 	 	
Total comprehensive income	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	65,462	 	
Purchase and retirement of redeemable common stock	 	—  	 	 	—  	 	 	(508	)	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(508	)	
Stock issued as director compensation	 	7	 	 	—  	 	 	109	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	109	 	
Stock-based compensation expense	 	—  	 	 	—  	 	 	2,930	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	2,930	 	
Sale of common stock	 	23,600	 	 	236	 	 	349,293	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	349,529	 	
Exercise of stock options, including related tax benefits of $19,257	 	3,942	 	 	39	 	 	31,298	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	31,337	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
BALANCE, December 31, 2007	 	134,149	 	$	1,341	 	$	705,778	 	 	$	—  	 	 	$	142,039	 	 	$	619	 	 	$	849,777	 	

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LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Other Comprehensive Income—(Continued)
(In thousands)

 	 	Common Stock	 	Additional
Paid-In
Capital	 	 	 	 	 	 	Accumulated
Other
Comprehensive
Income (Loss)	 	 	Total
Stockholders’
Equity	 	
 	 	Shares
Issued	 	Amount	 			 	Warrants	 	Retained
Earnings	 			 			
BALANCE, December 31, 2007	 	134,149	 	$	1,341	 	$	705,778	 	 	$	—  	 	$	142,039	 	$	619	 	 	$	849,777	 	
Net income	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	99,899	 	 	—  	 	 	 	99,899	 	
Unrealized gain on pension plan, net of tax	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	—  	 	 	144	 	 	 	144	 	
Unrealized loss on change in fair value of interest rate swap agreements, net of tax	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	—  	 	 	(8,841	)	 	 	(8,841	)	
Foreign currency translation	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	—  	 	 	(5,686	)	 	 	(5,686	)	
	 		 			 				 			 			 				 	 	 	 	
Total comprehensive income	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	—  	 	 	—  	 	 	 	85,516	 	
Stock issued in business acquisitions	 	2,919	 	 	29	 	 	60,012	 	 	 	—  	 	 	—  	 	 	—  	 	 	 	60,041	 	
Share price guarantee	 	—  	 	 	—  	 	 	(3,275	)	 	 	—  	 	 	—  	 	 	—  	 	 	 	(3,275	)	
Stock issued as director compensation	 	7	 	 	—  	 	 	122	 	 	 	—  	 	 	—  	 	 	—  	 	 	 	122	 	
Stock-based compensation expense	 	—  	 	 	—  	 	 	4,671	 	 	 	—  	 	 	—  	 	 	—  	 	 	 	4,671	 	
Activity related to restricted stock awards	 	190	 	 	2	 	 	703	 	 	 	—  	 	 	—  	 	 	—  	 	 	 	705	 	
Exercise of stock options, including related tax benefits of $12,547	 	2,656	 	 	27	 	 	22,922	 	 	 	—  	 	 	—  	 	 	—  	 	 	 	22,949	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
BALANCE, December 31, 2008	 	139,921	 	$	1,399	 	$	790,933	 	 	$	—  	 	$	241,938	 	$	(13,764	)	 	$	1,020,506	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The accompanying notes are an integral part of the consolidated financial statements.
 
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 LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business
The financial statements presented in this report 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 “the Company,” “we,” “us,” or “our” are used in this document, those terms refer to LKQ Corporation and its consolidated subsidiaries.
We are the largest nationwide provider of recycled vehicle original equipment manufacturer (“OEM”) products and related services, and with our acquisition of Keystone Automotive Industries, Inc. (“Keystone”) in October 2007, we are also the largest nationwide provider of aftermarket collision replacement products and refurbished bumper covers and wheels. We operate out of a total of approximately 280 facilities offering our customers a broad range of replacement systems, components, and parts to repair vehicles.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of LKQ Corporation and its subsidiaries. All intercompany transactions and accounts have been eliminated.
Use of Estimates
In preparing our financial statements in conformity with accounting principles generally accepted in the United States we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Per Share Amounts
All per share amounts and the number of shares for all periods have been retroactively adjusted to reflect the two-for-one stock split paid as a stock dividend on December 3, 2007. See Note 3, “Capital Structure,” for further discussion.
Revenue Recognition
The majority of our revenue is derived from the sale of recycled OEM products and aftermarket products. Revenue is recognized when the products are shipped and title has transferred, subject to an allowance for estimated returns, discounts and allowances that we estimate based upon historical information. We have recorded a reserve for estimated returns, discounts and allowances of approximately $11.2 million and $7.5 million at December 31, 2008 and 2007, respectively. Revenue from the sale of separately-priced extended warranty contracts is reported as deferred revenue and recognized ratably over the term of the contracts.
Shipping & Handling
Revenue also includes amounts billed to customers related to shipping and handling of approximately $14.3 million, $11.3 million and $8.8 million during the years ended December 31, 2008, 2007 and 2006, respectively. Distribution expenses in the accompanying consolidated statements of income are the costs incurred to prepare and deliver products to customers, including shipping and handling costs.
 
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Cash and Equivalents
We consider all highly liquid investments with original maturities of 90 days or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value. Our cash equivalents primarily include holdings in money market funds and overnight securities.
Receivables
We have recorded a reserve for uncollectible accounts of approximately $5.8 million and $4.3 million at December 31, 2008 and 2007, respectively. The reserve is based upon our assessment of the collectability of specific customer accounts, the aging of the accounts receivable and historical experience.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and equivalents and accounts receivable. We control our exposure to credit risk associated with these instruments by (i) placing our cash and equivalents with several major financial institutions; (ii) holding high-quality financial instruments; and (iii) maintaining strict policies over credit extension that include credit evaluations, credit limits and monitoring procedures. In addition, our overall credit risk with respect to accounts receivable is limited to some extent because a large number of geographically diverse customers make up our customer base.
Inventory
A salvage product is a recycled vehicle part suitable for sale as a replacement part. A core is a recycled mechanical part that is not suitable for sale as a replacement part without further remanufacturing work. Salvage inventory and cores are recorded at the lower of cost or market. Cost is established based upon the price we pay for a vehicle, and includes average costs for buying, dismantling, and where applicable, auction fees and storage, and towing. Inventory carrying value is determined using the average cost to sales percentage at each of our facilities and applying that percentage to the facility’s inventory at expected selling prices. The average cost to sales percentage is derived from each facility’s historical vehicle profitability for salvage vehicles purchased at auction or from contracted rates for salvage vehicles acquired under certain direct procurement arrangements.
An aftermarket product is a new vehicle product manufactured by a company other than the OEM. Cost is established based upon the average price for purchased parts, and includes expenses incurred for freight and buying, where applicable. For items purchased from foreign companies, import fees and duties and transportation insurance are also included. Refurbished inventory cost is based upon the average price paid for cores, and also includes expenses incurred for freight, buying and refurbishing overhead. Aftermarket products and refurbished inventory is recorded at the lower of cost or market.
For all inventory, carrying value is reduced regularly to the lower of cost or market to reflect the age of the inventory and current anticipated demand. If actual demand differs from our estimates, additional reductions to inventory carrying value would be necessary in the period such determination is made.
Inventory consists of the following (in thousands):

 	  	December 31,	
 	  	2008	  	2007	
Salvage products	  	$	140,126	  	$	111,775	
Aftermarket and refurbished products	  	 	184,527	  	 	201,408	
Core facilities inventory	  	 	8,103	  	 	7,055	
	  	 	 	  	 	 	
	  	$	332,756	  	$	320,238	

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Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and improvements that extend the useful life of the related asset are capitalized. As property and equipment are sold or retired, the applicable cost and accumulated depreciation are removed from the accounts and any resulting gain or loss thereon is recognized. Construction in progress consists primarily of building and land improvements at our existing facilities and costs associated with the development of internal-use software projects. Depreciation is calculated using the straight-line method over the estimated useful lives or, in the case of leasehold improvements, the term of the related lease and renewal periods, if shorter. Other estimated useful lives are as follows:

Land improvements	  	10-20 years	
Buildings and improvements	  	20-40 years	
Furniture, fixtures and equipment	  	5-20 years	
Computer equipment and software	  	3-10 years	
Vehicles and trailers	  	3-10 years	
Property and equipment consists of the following (in thousands):

 	  	December 31,	 	
 	  	2008	 	 	2007	 	
Land and improvements	  	$	49,955	 	 	$	40,397	 	
Buildings and improvements	  	 	72,665	 	 	 	64,239	 	
Furniture, fixtures and equipment	  	 	106,478	 	 	 	76,607	 	
Computer equipment and software	  	 	42,535	 	 	 	30,230	 	
Vehicles and trailers	  	 	20,417	 	 	 	16,051	 	
Leasehold improvements	  	 	31,105	 	 	 	24,224	 	
	  	 	 	 	 	 	 	 	
	  	 	323,155	 	 	 	251,748	 	
Less—Accumulated depreciation	  	 	(77,540	)	 	 	(53,908	)	
Construction in progress	  	 	13,341	 	 	 	19,219	 	
	  	 	 	 	 	 	 	 	
	  	$	258,956	 	 	$	217,059	 	
	  	 	 	 	 	 	 	 	
We capitalize costs incurred in connection with obtaining and the development of internal use computer software in accordance with the American Institute of Certified Public Accountant’s Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.”
We capitalize interest on assets under construction or development, including internal-use software.
Intangible Assets
Intangible assets consist primarily of goodwill (the cost of purchased businesses in excess of the fair value of the identifiable net assets acquired), and other specifically identifiable intangible assets such as the trade name acquired in connection with our acquisition of Keystone in October 2007, covenants not to compete and trademarks.
Goodwill is tested for impairment at least annually. We performed annual impairment tests during the fourth quarter of 2008, 2007 and 2006. The results of these tests indicated that goodwill was not impaired.
 
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The changes in the carrying amount of goodwill are as follows (in thousands):

Balance as of January 1, 2006	  	$	181,792	 	
Adjustment of previously recorded goodwill	  	 	4,543	 	
Business acquisitions	  	 	59,897	 	
	  	 	 	 	
Balance as of December 31, 2006	  	 	246,232	 	
Adjustment of previously recorded goodwill	  	 	1,921	 	
Exchange rate effects	  	 	1,403	 	
Business acquisitions	  	 	576,325	 	
	  	 	 	 	
Balance as of December 31, 2007	  	 	825,881	 	
Adjustment of previously recorded goodwill	  	 	6,511	 	
Exchange rate effects	  	 	(7,459	)	
Business acquisitions	  	 	98,874	 	
	  	 	 	 	
Balance as of December 31, 2008	  	$	923,807	 	
	  	 	 	 	
In 2008, we adjusted previously recorded goodwill by $6.5 million, including a $6.8 million increase related to the Keystone acquisition and a $0.3 million decrease related to other acquisitions made in 2007. The Keystone adjustments included increases to goodwill for: (i) a $3.1 million reduction in fixed asset values; (ii) final current asset and liability valuation adjustments of $3.8 million, including adjustments to increase the allowance for estimated returns, discounts and allowances and the accrual for unused vacation; and (iii) tax basis and reserve adjustments totaling $3.0 million. These increases to goodwill were partially offset by $1.8 million in reductions to the restructuring reserves as discussed in Note 8, “Restructuring and Integration Costs,” and a $1.3 million refund of an overpayment on Keystone shares at the acquisition date.
In 2007, we adjusted previously recorded goodwill by $1.9 million resulting from the accrual of a $1.9 million contingent payment to former shareholders of Fit-Rite Body Parts, Inc. (“Fit-Rite”).
In 2006, we adjusted previously recorded goodwill by $4.5 million. These adjustments included a $2.7 million payment to former shareholders of Fit-Rite, based upon achievement of certain post acquisition wholesale revenue levels and post acquisition gross margin targets. In addition, we made final asset and liability valuation adjustments for acquisitions made during 2005 of $1.4 million and recorded facility closure reserves of $0.4 million for two locations acquired in the Fit-Rite acquisition.
Other intangible assets totaled approximately $71.1 million and $75.0 million at December 31, 2008 and 2007, respectively. Accumulated amortization of other intangible assets at December 31, 2008 and 2007 was approximately $5.1 million and $1.0 million, respectively. Amortization expense was approximately $4.1 million, $0.9 million and $0.0 million during the years ended December 31, 2008, 2007 and 2006, respectively. Covenants not to compete are amortized over the lives of the respective agreements, which range from three to five years, on a straight-line basis. The Keystone trade name was valued at approximately $74.7 million and is being amortized over 20 years on a straight-line basis. Estimated annual amortization expense for the years ended December 31, 2009 through 2013 is approximately $4.0 million.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. There were no adjustments to the carrying value of long-lived assets during the years ended December 31, 2008, 2007 or 2006.
 
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Investments
Prior to our acquisition of Keystone on October 12, 2007, we held common shares of Keystone, which were classified as an available-for-sale investment security under Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). Accordingly, the investment was included in Other Assets at its fair value of approximately $2.2 million at December 31, 2006, with the unrealized gain excluded from earnings and included in Accumulated other comprehensive income, net of applicable taxes. The fair value of this investment at December 31, 2006 was estimated based upon the quoted market price for these securities. We sold a portion of our investment and included the realized gains of $0.7 million in other (income) expense during the year ended December 31, 2006. Upon our acquisition of Keystone on October 12, 2007, the unrealized gain was removed from Accumulated other comprehensive income, net of applicable taxes, and the original cost of the common shares was considered a component of the purchase price.
Fair Value of Financial Instruments
Our financial instruments include cash and equivalents, net trade receivables, cash surrender value of life insurance policies, accounts payable, deferred compensation liabilities, interest rate swaps and debt. The carrying amounts of financial instruments approximate fair value, including debt as it consists of primarily variable interest rate notes. We use the market approach to value our financial assets and liabilities, determined using available market information. Fair value disclosures required by SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), are included in Note 15.
Accounts Payable
In accordance with Financial Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts,” we have reclassified net book overdrafts of approximately $13.7 million to Accounts payable at December 31, 2008.
Accrued Expenses
We self-insure a portion of employee medical benefits under the terms of our employee health insurance program. We purchase certain stop-loss insurance to limit our liability exposure. We also self-insure a portion of our property and casualty risk, which includes automobile liability, general liability, workers’ compensation and property under deductible insurance programs. The insurance premium costs are expensed over the contract periods. A reserve for liabilities associated with these losses is established for claims filed and claims incurred but not yet reported based upon our estimate of ultimate cost, which is calculated using analyses of historical data. We monitor new claims and claim development as well as trends related to the claims incurred but not reported in order to assess the adequacy of our insurance reserves. Other accrued expenses include insurance reserves of approximately $26.2 million and $19.6 million, net of claims deposits of $0.8 million and $2.0 million, at December 31, 2008 and 2007, respectively. While we do not expect the amounts ultimately paid to differ significantly from our estimates, our insurance reserves and corresponding expenses could be affected if future claim experience differs significantly from historical trends and assumptions.
We have entered into certain arrangements whereby salvage vehicles are obtained directly from major insurance companies and automotive manufacturers at a cost calculated as a percentage of the revenue generated from each vehicle. Accrued expenses include an estimated liability of approximately $1.7 million and $1.5 million at December 31, 2008 and 2007, respectively, for salvage inventory procured under such arrangements.
 
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Product Warranties
We generally warrant certain mechanical parts against defects for a period of six months. Based on historical warranty claims, we accrue the estimated costs of the warranty coverage at the time of sale. The changes in the warranty reserve are as follows (in thousands):

Balance as of January 1, 2007	  	$	410	 	
Warranty expense	  	 	3,876	 	
Warranty claims	  	 	(3,706	)	
	  	 	 	 	
Balance as of December 31, 2007	  	 	580	 	
Warranty expense	  	 	3,681	 	
Warranty claims	  	 	(3,721	)	
	  	 	 	 	
Balance as of December 31, 2008	  	$	540	 	
	  	 	 	 	
Income Taxes
Current income taxes are provided on income reported for financial reporting purposes, adjusted for transactions that do not enter into the computation of income taxes payable in the same year. Deferred income taxes have been provided to show the effect of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before we are able to realize their benefit or that future deductibility is uncertain.
Effective January 1, 2007, we adopted the provisions of FIN No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). As a result of the implementation, we recognized an increase of approximately $0.3 million (net of tax effect) in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.
FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. Our policy is to include interest and penalties associated with income tax obligations in income tax expense.
Income taxes are not provided on our interest in undistributed earnings of foreign subsidiaries when it is management’s intent that such earnings will remain invested in those subsidiaries. Taxes will be provided on these earnings in the period in which a decision is made to repatriate the earnings.
Other Noncurrent Liabilities
Other Noncurrent Liabilities include approximately $14.5 million at December 31, 2008 related to the interest rate swap as discussed in Note 5. Other Noncurrent Liabilities also include approximately $3.5 million and $4.4 million at December 31, 2008 and 2007, respectively, related to employee nonqualified deferred compensation plans as discussed in Note 10 and approximately $1.6 million and $3.9 million at December 31, 2008 and 2007, respectively, related to a long term incentive plan for certain key employees as discussed in Note 14.
Other Noncurrent Liabilities also include approximately $0.5 million and $0.7 million at December 31, 2008 and 2007, respectively, related to unasserted claims that are deemed probable of assertion. In the event the
 
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unasserted claims are asserted and resolved for amounts different than those accrued, or are determined to no longer be probable in future periods, the amounts so determined would be adjusted to income in the periods such determination is made.
Depreciation Expense
Included in Cost of Goods Sold is depreciation expense associated with refurbishing and smelting operations.
Stock-Based Compensation
On January 1, 2006, we adopted the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), requiring us to recognize expense related to the fair value of our share-based compensation awards (see Note 4). We elected to use the modified prospective transition method, pursuant to which prior periods are not restated. Compensation expense for all share-based payments granted or modified after the effective date is recognized prospectively based upon the requirements of SFAS 123R and compensation expense for all unvested share-based payments as of January 1, 2006 that were issued subsequent to the filing of the registration statement regarding our initial public offering in October 2003 is recognized prospectively based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), net of estimated forfeitures. When estimating forfeitures, we consider voluntary and involuntary termination behavior as well as analysis of our historical option forfeitures. We have elected to recognize compensation expense on a straight-line basis over the requisite service period of the award.
The components of pre-tax stock-based compensation expense are as follows (in thousands):

 	  	Year Ended December 31,	
 	  	2008	  	2007	  	2006	
Stock options	  	$	4,671	  	$	2,930	  	$	2,389	
Restricted stock	  	 	705	  	 	—  	  	 	—  	
Stock issued in lieu of quarterly cash compensation for a non-employee director	  	 	122	  	 	109	  	 	72	
	  	 	 	  	 	 	  	 	 	
Total stock-based compensation expense	  	$	5,498	  	$	3,039	  	$	2,461	
	  	 	 	  	 	 	  	 	 	
The following table sets forth the total stock-based compensation expense resulting from stock options and restricted stock included in our Consolidated Statements of Income (in thousands):

 	  	Year Ended December 31,	 	
 	  	2008	 	 	2007	 	 	2006	 	
Cost of goods sold	  	$	13	 	 	$	13	 	 	$	13	 	
Facility and warehouse expenses	  	 	2,015	 	 	 	958	 	 	 	599	 	
Selling, general and administrative expenses	  	 	3,470	 	 	 	2,068	 	 	 	1,849	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
	  	 	5,498	 	 	 	3,039	 	 	 	2,461	 	
Income tax benefit	  	 	(2,166	)	 	 	(1,186	)	 	 	(960	)	
	  	 	 	 	 	 	 	 	 	 	 	 	
Total stock based compensation, net of tax	  	$	3,332	 	 	$	1,853	 	 	$	1,501	 	

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We have not capitalized any stock-based compensation cost during the years ended December 31, 2008, 2007 or 2006. As of December 31, 2008, unrecognized compensation expense related to unvested stock options and restricted stock is expected to be recognized as follows (in thousands):

 	  	Stock
Options	  	Restricted
Stock	  	Total	
2009	  	$	4,587	  	$	727	  	$	5,314	
2010	  	 	4,226	  	 	727	  	 	4,953	
2011	  	 	3,386	  	 	727	  	 	4,113	
2012	  	 	2,464	  	 	727	  	 	3,191	
2013	  	 	99	  	 	22	  	 	121	
	  	 	 	  	 	 	  	 	 	
Total unrecognized compensation expense	  	$	14,762	  	$	2,930	  	$	17,692	
	  	 	 	  	 	 	  	 	 	
The fair value of stock options has been estimated using the Black-Scholes option-pricing model. The following table summarizes the weighted average assumptions used to compute the fair value of stock option grants:

 	  	Year Ended December 31,	 	
 	  	2008	 	 	2007	 	 	2006	 	
Expected life (in years)	  	 	6.4	 	 	 	6.4	 	 	 	6.2	 	
Risk-free interest rate	  	 	3.27	%	 	 	4.37	%	 	 	4.38	%	
Volatility	  	 	39.4	%	 	 	40.0	%	 	 	40.0	%	
Dividend yield	  	 	0	%	 	 	0	%	 	 	0	%	
Weighted average fair value of options granted	  	$	8.51	 	 	$	5.15	 	 	$	4.60	 	
Expected life—The expected life represents the period that our stock-based awards are expected to be outstanding. Due to the limited information available regarding historical exercise experience, we have elected to use the simplified expected term method as permitted by the Securities and Exchange Commission Staff Accounting Bulletin No. 107 (“SAB 107”), as amended by Staff Accounting Bulletin No. 110 (“SAB 110”).
Risk-free interest rate—We base the risk free interest rate used in the Black-Scholes option-pricing model on the implied yield available on U.S. Treasury zero-coupon issues with the same or substantially equivalent remaining term.
Expected volatility—We use the trading history and historical volatility of our common stock, and because of limited historical data available on the price of our publicly traded shares, the volatility of similar entities whose share prices are publicly available in determining an estimated volatility factor for the Black-Scholes option-pricing model.
Expected dividend yield—We have not declared and have no plans to declare dividends and have therefore used a zero value for the expected dividend yield in the Black-Scholes option-pricing model.
Estimated forfeitures—When estimating forfeitures, we consider voluntary and involuntary termination behavior as well as analysis of historical forfeitures. A forfeiture rate of 8.0% has been used for valuing employee option grants, while a forfeiture rate of 0% has been used for valuing director and executive officer option grants.
Rental Expense
We recognize rental expense on a straight-line basis over the respective lease terms for all of our operating leases.
 
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Earnings per Share
Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporate the incremental shares issuable upon the assumed exercise of stock options, the assumed vesting of restricted stock and warrants. Certain of our stock options were excluded from the calculation of diluted earnings per share because they were antidilutive, but these options could be dilutive in the future.
Segment Information
Over 96% of our operations are conducted in the United States. During 2004, we acquired a recycled OEM products business with locations in Guatemala and Costa Rica. In 2007 and 2008, we acquired four recycled OEM products businesses located in Canada. Keystone, which we acquired in October 2007, has bumper refurbishing operations in Mexico and aftermarket products businesses located in Canada. Revenue generated and properties located outside of the United States are not material.
During the third quarter of 2008, we commenced a reorganization of our vehicle replacement products operations into 11 operating segments, combining our wholesale recycled OEM products and aftermarket products on a geographic basis, with a separate operating segment for our self-service retail OEM products and one for our recycled heavy truck parts operations. These segments are aggregated into one reportable segment because they possess similar economic characteristics and have common products and services, customers and methods of distribution. The vehicle replacement products operations account for over 95% of our revenue, earnings and assets.
The following table sets forth our revenue by product category (in thousands):

 	  	Year Ended December 31,	
 	  	2008	  	2007	  	2006	
Recycled products and related products and services	  	$	660,731	  	$	535,907	  	$	467,869	
Aftermarket, other new and refurbished products	  	 	998,690	  	 	409,428	  	 	196,454	
Other	  	 	277,880	  	 	181,490	  	 	125,058	
	  	 	 	  	 	 	  	 	 	
	  	$	1,937,301	  	$	1,126,825	  	$	789,381	
	  	 	 	  	 	 	  	 	 	
Foreign Currency Translation
For our foreign operations, the local currency is the functional currency. Assets and liabilities are translated into U.S. dollars at the period-ending exchange rate. Statement of Income amounts are translated to U.S. dollars using average exchange rates during the period. Translation gains and losses are reported as a component of accumulated other comprehensive income in Stockholders’ Equity. Gains and losses from foreign currency transactions are included in current earnings.
Recent Accounting Pronouncements
Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) as it pertains to financial assets and liabilities. In accordance with the provisions of FASB Staff Position (FSP) 157-2, we elected to defer the adoption of SFAS 157 relating to the fair value of non-financial assets and liabilities. We are currently evaluating the impact, if any, of applying SFAS 157 to our non-financial assets and liabilities. SFAS 157 established a framework for reporting fair value and expands disclosures required for fair value measurements. Although the adoption of SFAS 157 did not have a significant impact on our consolidated financial position, results of operations or cash flows, we are now required to provide additional disclosures as
 
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part of our financial statements. These additional disclosures are provided in Note 15, “Fair Value Measurements.”
Effective January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). Upon our adoption of SFAS 159, we did not elect the fair value option for any financial assets or liabilities. Therefore, the adoption of SFAS 159 did not have an impact on our consolidated financial position, results of operations or cash flows.
In December 2007, the U.S. Securities and Exchange Commission (“SEC”) issued SAB 110 to amend the SEC’s views discussed in SAB 107 regarding the use of the simplified method in developing an estimate of expected life of share options in accordance with SFAS No. 123R. We will continue to use the simplified method until we have the historical data necessary to provide a reasonable estimate of expected life in accordance with SAB 107, as amended by SAB 110.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). Under SFAS 141R, companies will be required to, among other things, recognize the assets acquired, liabilities assumed, including contractual contingencies, and contingent consideration at fair value on the date of acquisition. SFAS 141R also requires that acquisition-related expenses be expensed as incurred, restructuring costs be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred income tax asset valuation allowances and acquired income tax uncertainties after the measurement period be expensed in income tax expense. We adopted SFAS 141R on January 1, 2009 and will apply it to business combinations prospectively.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of SFAS No. 133” (“SFAS 161”). SFAS 161 requires enhanced disclosures about derivative and hedging activities and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The disclosure provisions of SFAS 161 are effective as of the beginning of our 2009 fiscal year. As SFAS 161 specifically relates to disclosures regarding derivative and hedging activities, it will not impact our consolidated financial position, results of operations or cash flows.
In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of FSP No. 142-3 on January 1, 2009 did not have an effect on our consolidated financial statements.
Note 3. Capital Structure
On February 14, 2001, we issued warrants to purchase 7,844,448 shares of our common stock at an exercise price of $0.50 per share to certain stockholder guarantors. We had breached certain covenants of our credit facility including covenants relating to operating income and the minimum required ratio of funded debt to earnings before interest, taxes, depreciation and amortization. We entered into an amendment to the credit agreement with our banks that waived the breaches and modified certain of the covenants. As part of the amendment, the banks required that stockholders guaranty $10 million of the debt, with the guaranties secured by letters of credit or other highly liquid collateral acceptable to the banks. All of our stockholders were given the opportunity to participate in this transaction and 30 of our stockholders provided the guaranties. In exchange for providing the guaranties, each guarantor received certain rights, including a guaranty fee. The guaranty fee consisted of each guarantor’s pro rata portion of warrants to purchase a total of 7,844,448 shares of our common stock (10% of the then outstanding shares of common stock assuming exercise of these warrants) at an exercise
 
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price of $0.50 per share. The warrants became exercisable upon issuance and were to expire on February 14, 2006. All such warrants were exercised prior to the expiration date. The warrants were valued at approximately $401,000 at the date of grant. Warrants to purchase 1,570,144 shares of our common stock at a price of $0.50 per share were exercised during the year ended December 31, 2006. The stockholder guaranties were cancelled in June 2002 when we entered into a new credit facility.
On January 1, 2003, in connection with a business acquisition, we issued 200,000 shares of our common stock. We granted a put option on those shares with a single exercise date of January 1, 2007 at a price of $3.75 per share and obtained a call option on those shares with a single exercise date of January 1, 2007 at a price of $5.625 per share. We exercised the call option in 2007 and retired the shares.
On December 15, 2005, our Board of Directors approved a two-for-one split of our common stock in the form of a stock dividend. Each stockholder of record at the close of business on January 3, 2006 received an additional share of common stock for every outstanding share held. The payment date was January 13, 2006, and the common stock began trading on a split-adjusted basis on January 17, 2006. On November 5, 2007, our Board of Directors approved a two-for-one split of our common stock payable as a stock dividend. Each stockholder of record at the close of business on November 16, 2007 received an additional share of common stock for every outstanding share held. The payment date was December 3, 2007, and the common stock began trading on a split-adjusted basis on December 4, 2007. All share and per share amounts for all periods presented have been adjusted to reflect the stock splits.
On September 25, 2007, we completed the sale of 23,600,000 shares of our common stock pursuant to a registration statement filed with the SEC. Pursuant to the same registration statement, the selling stockholders named in the registration statement sold 4,000,000 shares of our common stock. We received $349.5 million, net of the underwriting discount and net of offering related expenses of approximately $0.7 million, for the common stock we issued and sold. We did not receive any proceeds from the sale of shares by the selling stockholders. We also received approximately $2.8 million in proceeds from the exercise of 1,000,000 stock options by certain members of management in connection with the offering.
On March 4, 2008, in connection with the acquisition of Texas Best Diesel, L.P., we issued 838,073 shares of our common stock.
On August 25, 2008, in connection with the acquisition of Pick-Your-Part Auto Wrecking (“PYP”), we issued 2,080,561 shares of our common stock.
Note 4. Equity Incentive Plans
In February 1998, we adopted the LKQ Corporation 1998 Equity Incentive Plan to attract and retain employees and consultants. Under the Equity Incentive Plan, both qualified and nonqualified stock options, stock appreciation rights, restricted stock, performance shares and performance units may be granted. On March 6, 2002, our stockholders approved an increase in the number of shares available under the Equity Incentive Plan from 12.0 million to 20.0 million, subject to antidilution and other adjustment provisions. On May 9, 2005, our stockholders approved an increase in the number of shares available under the Equity Incentive Plan from to 20.0 million to 28.0 million, subject to antidilution and other adjustment provisions.
In June 2003, our Board of Directors adopted the LKQ Corporation Stock Option and Compensation Plan for Non-Employee Directors and in September 2003, the plan was approved by our stockholders. Options granted under the Director Plan were automatic and nondiscretionary, and the exercise price of the options was 100% of the fair market value of our common stock on the grant date. Only non-employee directors were eligible for grants under the Director Plan. On March 5, 2007, our Board of Directors amended the Director Plan to eliminate the annual option grants to non-employee directors. The amendment was effective commencing with the second quarter of 2007. On October 12, 2007, our Board of Directors further amended the Director Plan to eliminate the
 
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initial option grant to new, non-employee directors. The Director Plan will terminate in June 2013, unless our Board of Directors terminates it sooner. The number of shares available under the Director Plan is 2,000,000, subject to antidilution and other adjustment provisions.
During January 2009, 2008 and 2007, our Board of Directors made an annual grant of options to employees to purchase a total of 1,548,300, 1,392,250 and 965,000 shares of our common stock at an exercise price of $11.955, $19.135 and $10.06 per share, respectively. The options vest over a period of five years.
On January 9, 2009, our Board of Directors granted options to non-employee directors to purchase a total of 240,000 shares of our common stock at an exercise price of $11.955 per share. The options vest over a period of five years.
On January 11, 2008, our Board of Directors granted a total of 190,000 shares of restricted stock to certain of our key employees under our Equity Incentive Plan. The grant-date fair value of the awards was approximately $3.6 million, or $19.14 per share. Vesting of the awards is subject to a continued service condition, with 20% of the shares vesting each year on the anniversary date of the grant. The fair value of each share of restricted stock awarded was equal to the market value of a share of our common stock on the grant date. Until the shares of restricted stock vest, they may not be sold, pledged or otherwise transferred and are subject to forfeiture upon the recipient’s voluntary termination of employment or termination for cause.
Stock options expire ten years from the date they are granted. Most of the options granted under the Equity Incentive Plan vest over a period of five years. Most of the options granted under the Director Plan vest six months after the date of grant. We expect to issue new shares of common stock to cover future stock option exercises.
We issue new shares of our common stock upon the exercise of stock options. A summary of transactions in our stock-based compensation plans is as follows:

 	  	 	 	 	 	  	Stock Options	
   	  	Restricted
Shares and
Options
Available
for Grant	 	 	Restricted
Shares
Outstanding	  	Number of
Shares
Outstanding	 	 	Weighted
Average
Exercise
Price	
Balance, January 1, 2006	  	8,987,640	 	 	—  	  	15,033,340	 	 	$	3.38	
Granted	  	(1,231,000	)	 	—  	  	1,231,000	 	 	 	9.95	
Exercised	  	—  	 	 	—  	  	(2,194,072	)	 	 	2.50	
Cancelled	  	93,688	 	 	—  	  	(93,688	)	 	 	7.38	
	  	 	 	 	 	  	 	 	 	 	 	
Balance, December 31, 2006	  	7,850,328	 	 	—  	  	13,976,580	 	 	 	4.07	
	  	 	 	 	 	  	 	 	 	 	 	
Granted	  	(1,080,000	)	 	—  	  	1,080,000	 	 	 	10.90	
Exercised	  	—  	 	 	—  	  	(3,942,126	)	 	 	3.06	
Cancelled	  	82,352	 	 	—  	  	(82,352	)	 	 	9.09	
	  	 	 	 	 	  	 	 	 	 	 	
Balance, December 31, 2007	  	6,852,680	 	 	—  	  	11,032,102	 	 	 	5.06	
	  	 	 	 	 	  	 	 	 	 	 	
Granted	  	(1,632,417	)	 	190,000	  	1,442,417	 	 	 	19.13	
Exercised	  	—  	 	 	—  	  	(2,656,266	)	 	 	3.92	
Cancelled	  	154,665	 	 	—  	  	(154,665	)	 	 	17.52	
	  	 	 	 	 	  	 	 	 	 	 	
Balance, December 31, 2008	  	5,374,928	 	 	190,000	  	9,663,588	 	 	$	7.27	

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The following table summarizes information about outstanding and exercisable stock options at December 31, 2008:

 	  	Outstanding	  	Exercisable	
Range of Exercise Prices	  	Shares	  	Weighted
Average
Remaining
Contractual
Life (Yrs)	  	Weighted
Average
Exercise
Price	  	Shares	  	Weighted
Average
Remaining
Contractual
Life (Yrs)	  	Weighted
Average
Exercise
Price	
$0.75	  	118,000	  	2.1	  	$	0.75	  	118,000	  	2.1	  	$	0.75	
2.00 – 2.50	  	1,028,170	  	3.7	  	 	2.10	  	1,028,170	  	3.7	  	 	2.10	
3.13 – 3.99	  	1,675,900	  	3.0	  	 	3.49	  	1,659,900	  	3.0	  	 	3.49	
4.16 – 4.72	  	3,308,286	  	5.8	  	 	4.37	  	3,051,901	  	5.8	  	 	4.36	
7.56 – 8.64	  	206,000	  	6.7	  	 	7.59	  	203,600	  	6.7	  	 	7.59	
9.33 – 12.42	  	1,922,840	  	7.6	  	 	10.03	  	833,860	  	7.5	  	 	10.11	
18.87 – 22.58	  	1,404,392	  	9.0	  	 	19.15	  	148,823	  	9.0	  	 	19.15	
	  	 	  		  			  	 	  		  			
	  	9,663,588	  	5.9	  	$	7.27	  	7,044,254	  	5.1	  	$	4.85	
	  	 	  		  			  	 	  		  			
At December 31, 2008, a total of 9,633,667 options with a weighted average exercise price of $7.26 and a weighted average remaining contractual life of 5.9 years were expected to vest. The total grant-date fair value of options that vested during the years ended December 31, 2008, 2007 and 2006 was approximately $3.7 million, $3.6 million and $2.4 million, respectively.
The aggregate intrinsic value (market value of our common stock less option exercise price) of outstanding, expected to vest and exercisable stock options at December 31, 2008 is $52.9 million, $52.8 million and $49.1 million, respectively. The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the closing price of our common stock on December 31, 2008, which would have been received by the option holders had all option holders exercised their options as of that date. This amount changes based upon the fair market value of our common stock. The total intrinsic value of stock options exercised was $33.5 million, $52.4 million and $18.5 million during the years ended December 31, 2008, 2007 and 2006, respectively.
Note 5. Long-Term Obligations
Long-Term Obligations consist of the following (in thousands):

 	  	December 31,	 	
 	  	2008	 	 	2007	 	
Senior secured debt financing facility:	  				 				
Term loans payable	  	$	632,983	 	 	$	650,252	 	
Revolving credit facility	  	 	5,342	 	 	 	—  	 	
Notes payable to individuals through August 2019, interest at 3.50% to 10.0%	  	 	4,549	 	 	 	8,210	 	
	  	 	 	 	 	 	 	 	
	  	 	642,874	 	 	 	658,462	 	
Less current maturities	  	 	(21,934	)	 	 	(16,936	)	
	  	 	 	 	 	 	 	 	
	  	$	620,940	 	 	$	641,526	 	

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The scheduled maturities of long-term obligations outstanding at December 31, 2008 are as follows (in thousands):

2009	  	$	21,934	
2010	  	 	31,353	
2011	  	 	49,506	
2012	  	 	74,232	
2013	  	 	465,352	
Thereafter	  	 	497	
	  	 	 	
	  	$	642,874	
	  	 	 	
We obtained a senior secured debt financing facility (“Credit Agreement”) from Lehman Brothers Inc. (“Lehman”) and Deutsche Bank Securities, Inc. (“Deutsche Bank”) on October 12, 2007, which was amended on October 26, 2007. The Credit Agreement has a six year term and includes a $610 million term loan, a $40 million Canadian currency term loan, a $100 million U.S. dollar revolving credit facility, and a $15 million dual currency facility for drawings of either U.S. dollars or Canadian dollars. The Credit Agreement also provides for (i) the issuance of letters of credit of up to $35 million in U.S. dollars and up to $10 million in either U.S. or Canadian dollars, (ii) for a swing line credit facility of $25 million under the $100 million revolving credit facility, and (iii) the opportunity for us to add additional term loan facilities and/or increase the $100 million revolving credit facility’s commitments, provided that such additions or increases do not exceed $150 million in the aggregate and provided further that no existing lender is required to make its pro rata share of any such additions or increases without its consent. All of the obligations under the Credit Agreement are unconditionally guaranteed by each of our domestic subsidiaries. Obligations under the Credit Agreement, including the related guarantees, are collateralized by a security interest in substantially all of our domestic assets and our U. S. subsidiaries and a pledge of not more than 65% of the total outstanding voting interests of any direct or indirect non-U.S. subsidiary of ours that is a “controlled foreign corporation.” Amounts under each term loan facility are due and payable in quarterly installments of increasing amounts that began in the first quarter of 2008, with the balance payable in full on October 12, 2013. Amounts due under each revolving credit facility will be due and payable October 12, 2013. We are also required to prepay the term loan facilities upon the sale of certain assets, upon the incurrence of certain debt, upon receipt of certain insurance and condemnation proceeds, and with up to 50% of our excess cash flow, with the amount of such excess cash flow determined based upon our total leverage ratio.
Borrowings against the senior secured credit facility totaled $638.3 million and $650.3 million at December 31, 2008 and 2007, respectively, of which $19.8 million and $10.0 million are classified as current maturities, respectively. The weighted-average interest rate on borrowings outstanding against the Company’s senior secured credit facility at December 31, 2008 and 2007 were 4.62% and 7.53%, respectively.
As of December 31, 2008, included in our borrowings against the senior secured credit facility were borrowings of approximately $5.3 million on our $115 million revolving credit facility. Availability on the revolving credit facility is reduced by outstanding letters of credit totaling approximately $23.2 million. At December 31, 2008, availability on the revolving credit facility totaled approximately $86.4 million. Lehman Commercial Paper Inc. (“LCP”) filed for protection under Chapter 11 of the Federal Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York on October 5, 2008. LCP accounts for $15 million of revolver funding commitment and serves as our swing line lender. Accordingly, we no longer believe this $15 million revolver commitment is available, so in effect our availability on the line has been reduced to $71.4 million. Our ability to access the swing line credit facility is also doubtful as a result of the bankruptcy filing. We believe that the LCP bankruptcy will not have a material adverse effect on our liquidity.
Indebtedness made and payable in U.S. dollars under the Credit Agreement bears interest, at our option, at (i) a base rate (the higher of (x) the rate that is the prime lending rate as set forth on the British Banking Association Reuters Page 5 or, under certain circumstances, such other comparable page as the agents may
 
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choose, as in effect from time to time, and (y) 0.5% in excess of the overnight federal funds rate) plus an applicable margin currently of 1.25% per annum, or (ii) a Eurodollar rate as determined by the administrative agent for the respective interest period plus an applicable margin currently of 2.25% per annum, except that indebtedness in respect of swing line loans bears interest only at the rate referred to in clause (i). Indebtedness made and payable in Canadian dollars under the Credit Agreement is made, at our option, as bankers’ acceptance loans or loans that bear interest at a rate equal to the rate per annum of interest publicly quoted or established as the “prime rate” of Deutsche Bank AG Canada Branch for commercial loans in Canadian dollars to its Canadian borrowers (which does not necessarily represent the lowest or best rate actually available) plus an applicable margin currently of 1.25% per annum. Under each bankers’ acceptance loan, each Canadian lender will purchase a bill of exchange, including a depository bill issued in accordance with the Depository Bills and Notes Act (Canada), denominated in Canadian dollars and discount notes, and we will sell such bill of exchange, at the applicable discount rate which, (1) in respect of any bill of exchange accepted by a lender named on Schedule I to the Bank Act (Canada), is the average of the annual rates for bankers’ acceptances having the same specified term and face amount as the loan to be made to us that is reported by the Reuters Screen CDOR Page as of 10:00 a.m. on such day (or the next preceding business day if such day is not a business day) (or if not reported by the Reuters Screen, then will be the average of the discount rate offered by the five largest (by assets) Canadian charter banks) and (2) in respect of any other lender, the CDOR described above plus 0.10%. We will also pay an acceptance fee for each bankers’ acceptance loan currently equal to 2.25% per annum. The applicable margin and acceptance fee for loans under the revolving credit facilities are subject to a decrease of 0.25% based upon our total leverage ratio and the interest rate option chosen. Interest will be payable quarterly in arrears, except that interest based on a Eurodollar rate or bankers’ acceptance loans is payable in arrears on the last day of the relevant interest period and, for any Eurodollar interest period longer than three months, quarterly. Any default in the payment of principal, interest, or other overdue amounts bears interest at 2% above the rate otherwise applicable (or, if there is no applicable rate, at 2% above the base rate referred to in clause (i) above for loans made in U.S. dollars and the “prime rate” referred to in the second sentence of this paragraph for loans made in Canadian dollars). All overdue amounts are payable on demand.
The Credit Agreement contains customary representations and warranties, and contains customary covenants that restrict our ability to, among other things (i) incur liens, (ii) incur any indebtedness (including guarantees or other contingent obligations), (iii) engage in mergers and consolidations, (iv) engage in sales, transfers, and other dispositions of property and assets (including sale-leaseback transactions), (v) make loans, acquisitions, joint ventures, and other investments, (vi) make dividends and other distributions to, and redemptions and repurchases from, equity holders, (vii) prepay, redeem, or repurchase certain debt, (viii) make changes in the nature of our business, (ix) amend our organizational documents, or amend or otherwise modify certain of our debt documents, (x) change our fiscal quarter and fiscal year ends, (xi) enter into transactions with LKQ’s affiliates, (xii) make dividends, loans, and other transfers by subsidiaries of LKQ, and (xiii) issue certain equity interests. The Credit Agreement also requires us to comply with certain financial, including compliance with the required senior secured debt ratio, and affirmative covenants. We were in compliance with all covenants as of December 31, 2008 and 2007.
The Credit Agreement contains events of default that include (i) the Company’s failure to pay principal when due or interest, fees, or other amounts after grace periods, (ii) covenant defaults, (iii) the Company’s material breach of any representation or warranty, (iv) cross defaults to certain other indebtedness, (v) bankruptcy, insolvency, or other similar proceedings, (vi) the Company’s inability to pay debts, (vii) judgment defaults of $15 million or more, (viii) customary ERISA and environmental defaults, (ix) actual or asserted invalidity of any material provision of the loan documentation or impairment of a portion of the collateral, (x) failure of subordinated indebtedness to be validly and sufficiently subordinated, and (xi) a change of control.
As part of the consideration for business acquisitions completed during 2008, 2007 and 2006, we issued promissory notes totaling approximately $1.6 million, $1.7 million and $7.2 million, respectively. The notes bear interest at annual rates of 3.5% to 6.0%, and interest is payable at maturity or in monthly installments.
 
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The weighted average interest rate at December 31, 2008 includes the effect of the following interest rate swap agreements, which we entered into in March 2008 and September 2008 to hedge a portion of the variable interest rate risk on our variable rate term loans:

Notional Amount	  	Effective Date	  	Maturity Date	  	Fixed Interest Rate*	 	
$	200,000,000	  	April 14, 2008	  	April 14, 2011	  	4.99	%	
$	50,000,000	  	April 14, 2008	  	April 14, 2010	  	4.68	%	
$	250,000,000	  	September 15, 2008	  	October 14, 2010	  	4.88	%	

*	Includes applicable margin of 2.25% per annum	
Beginning on the effective dates of the interest rate swap agreements, we will, on a monthly basis through the maturity date, pay the fixed interest rate and receive a variable rate of interest based on the London InterBank Offered Rate (“LIBOR”) on the notional amount. The interest rate swap agreements qualify as cash flow hedges, as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS 133”). As of December 31, 2008, the fair market value of these market contracts was a liability of approximately $14.5 million and is included in other non-current liabilities in the Consolidated Balance Sheet. The fair market value of the interest rate swaps is subject to changes in value due to changes in interest rates. Hedge ineffectiveness for the year ended December 31, 2008 was immaterial.
Note 6. Commitments and Contingencies
Operating Leases
We are obligated under noncancelable operating leases for corporate office space, warehouse and distribution facilities, trucks and certain equipment.
The future minimum lease commitments under these leases at December 31, 2008 are as follows (in thousands):

Years ending December 31:	  			
2009	  	$	48,022	
2010	  	 	40,316	
2011	  	 	32,386	
2012	  	 	25,923	
2013	  	 	20,959	
Thereafter	  	 	53,286	
	  	 	 	
Future Minimum Lease Payments	  	$	220,892	
	  	 	 	
Rental expense for operating leases was approximately $50.8 million, $27.4 million and $18.6 million during the years ended December 31, 2008, 2007 and 2006, respectively.
We guaranty the residual values of the majority of our truck and equipment operating leases. The residual values decline over the lease terms to a defined percentage of original cost. In the event the lessor does not realize the residual value when a piece of equipment is sold, we would be responsible for a portion of the shortfall. Similarly, if the lessor realizes more than the residual value when a piece of equipment is sold, we would be paid the amount realized over the residual value. Had we terminated all of our operating leases subject to these guaranties at December 31, 2008, the guarantied residual value would have totaled approximately $24.0 million.
Litigation and Related Contingencies
On December 2, 2005, Ford Global Technologies, LLC (“Ford”) filed a complaint under Section 337 of the Tariff Act of 1930 with the United States International Trade Commission (“USITC”) against Keystone
 
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Automotive Industries, Inc. and five other named Respondents, including four Taiwan-based manufacturers (collectively, the “F-150 Respondents”), alleging that certain aftermarket parts imported into the United States infringed on 14 design patents that Ford alleges cover eight parts on the 2004-2005 Ford F-150 truck.
On December 4, 2006, an administrative law judge of the USITC preliminarily ruled that seven of the Ford design patents were valid and that the importation of automotive parts covered by those seven patents violated Section 337 of the Tariff Act of 1930. On June 6, 2007, the USITC affirmed the ruling of the administrative law judge and issued an order prohibiting further importation of automotive parts covered by the patents. The USITC’s decision became final on August 6, 2007 upon the expiration without action of the 60-day Presidential review period. The parties have appealed the decision to the United States Circuit Court of Appeals for the Federal Circuit. The appeal is pending.
On May 2, 2008, Ford filed with the USITC another complaint under section 337 of the Tariff Act of 1930. The complaint alleges that LKQ Corporation, Keystone Automotive, and six other entities (collectively, the “Mustang Respondents”) import and sell certain automotive parts relating to the 2005 Ford Mustang that infringe eight Ford design patents. On May 29, 2008, the USITC issued a Notice of Investigation based on Ford’s complaint. The USITC’s Notice of Investigation was published in the Federal Register on June 5, 2008. On June 23, 2008, the Mustang Respondents filed their Response to the Complaint and Notice of Investigation. In the Response, the Mustang Respondents denied, among other things, that any of the Ford design patents is valid and/or enforceable and, accordingly, denied each and every allegation of infringement. The Mustang Respondents further asserted several affirmative defenses. The parties have substantially completed discovery. The USITC has set November 2009 as the target date for completion of the investigation.
We will continue to vigorously defend the December 2005 action and the May 2008 action. At the time the exclusion order was issued in the December 2005 action, the parts that were subject to the order comprised only a minimal amount of our sales. Similarly, the parts that relate to the May 2008 action comprise only a minimal amount of our sales. However, as such parts become incorporated into more vehicles over time, it is likely that the amount of our sales of such parts will increase or would have increased substantially. If the design patents in question are ultimately upheld as valid and infringed, it is not anticipated that the loss of sales of these parts over time will be materially adverse to our financial position, results of operations or cash flows. However, depending upon the nature and extent of any adverse ruling, auto manufacturers may attempt to assert similar allegations based upon design patents on a significant number of parts for several of their models, which over time could have a material adverse impact on the entire aftermarket parts industry.
We also have certain other contingent liabilities 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 believe that the probable resolution of such contingencies will not materially affect our financial position, results of operations or cash flows.
Note 7. Business Combinations
On August 25, 2008, we acquired a 100% equity interest in PYP. The consideration for PYP was comprised of $42.0 million in stock issued (2.1 million shares) and $34.0 million in net cash payments. The total cash outflow for PYP included a $3.3 million contingent payment to the former owners based on a share price guarantee for shares sold in the market during the month following the acquisition date. The guarantee period was closed as of September 30, 2008, and we do not anticipate any further payments to the former owners of PYP. As the payment was based on a contingency involving share prices, the $3.3 million has not been included in the cost of the acquired entity for purchase accounting but instead reduced additional paid-in capital. The final purchase price remains subject to change based on resolution of the working capital adjustment.
Also in 2008, we acquired a 100% interest in each of seven businesses (six in the recycled OEM parts business, including three providing recycled OEM heavy truck parts, and one wheel polishing business). The
 
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acquisitions enabled us to expand our presence in existing markets, increase our coverage of the Canadian market and become a provider of recycled OEM heavy truck parts. The aggregate consideration for these seven businesses totaled approximately $36.5 million in cash, net of cash acquired, $18.0 million in stock issued (0.8 million shares) and $1.6 million of debt issued.
On October 12, 2007, we completed our acquisition of 100% of the outstanding stock of Keystone, the nation’s leading distributor of aftermarket collision parts. Under the terms of the Agreement and Plan of Merger (“Merger Agreement”) among the Company, Keystone and LKQ Acquisition Company, a wholly-owned subsidiary of the Company (“Merger Sub”), Merger Sub was merged with and into Keystone with Keystone being the surviving corporation and becoming a wholly-owned subsidiary of the Company. Under the Merger Agreement, holders of shares of Keystone common stock received $48.00 in cash in exchange for each such share, representing an aggregate cash consideration, including transaction costs, net of deferred taxes, and assumed cash of approximately $807 million on a fully diluted basis. In September 2008, we received a refund of approximately $1.3 million of the purchase price for an overpayment on Keystone shares at the acquisition date.
Also in 2007, we acquired a 100% equity interest in each of eleven businesses (eight in the recycled OEM products business, including on July 3, 2007 Pintendre Autos, a recycled parts business located near Quebec City, Canada, two in the aftermarket products business, and one that refurbishes and distributes head lamps and tail lamps) for an aggregate of $59.3 million in cash and $1.7 million in notes issued to the sellers. These 2007 acquisitions enabled us to expand our presence in existing markets, serve new market areas and expand our product line offering.
During 2006, we acquired a 100% equity interest in each of ten businesses (seven in the recycled OEM automotive parts business, two in the aftermarket automotive parts business and, on January 31, 2006 Transwheel Corporation, an aluminum alloy wheel refurbishing and distribution business) for an aggregate of $71.1 million in cash and $7.2 million in notes issued to the sellers. The acquisitions enabled us to serve new market areas and become a significant provider of refurbished wheels.
In connection with our December 29, 2005 acquisition of Fit-Rite, we paid $1.8 million during 2008 to settle the final contingent payment.
The acquisitions are being accounted for under the purchase method of accounting and are included in our consolidated financial statements from the dates of acquisition. The purchase prices were allocated to the net assets acquired based upon estimated fair market values at the dates of acquisition. In connection with the 2008 business acquisitions, the purchase price allocations are preliminary as we are in the process of determining the following: 1) valuation amounts for certain of the inventories and fixed assets acquired and the fair value of liabilities assumed, 2) the value of intangibles, if any, acquired and 3) the final estimation of the tax basis of the entities acquired. During the year ended December 31, 2008, we made adjustments to the preliminary purchase price allocations to finalize the inventory and fixed asset valuations, reserve balances and the estimated tax basis for certain of the businesses acquired in 2007.
 
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The purchase price allocations for the acquisitions completed during the years ended December 31, 2008 and 2007 are as follows (in thousands):

 	  	December 31,	 	
 	  	2008 (Preliminary)	 	 	2007	 	
 	  	PYP	 	 	Other
Acquisitions	 	 	Total	 	 	Keystone	 	 	Other
Acquisitions	 	 	Total	 	
Receivables, net	  	$	4,865	 	 	$	1,902	 	 	$	6,767	 	 	$	60,389	 	 	$	3,061	 	 	$	63,450	 	
Inventory	  	 	7,666	 	 	 	10,347	 	 	 	18,013	 	 	 	147,883	 	 	 	13,180	 	 	 	161,063	 	
Prepaid expenses	  	 	313	 	 	 	49	 	 	 	362	 	 	 	4,718	 	 	 	310	 	 	 	5,028	 	
Property and equipment	  	 	7,755	 	 	 	4,232	 	 	 	11,987	 	 	 	53,348	 	 	 	10,421	 	 	 	63,769	 	
Goodwill	  	 	57,593	 	 	 	41,281	 	 	 	98,874	 	 	 	544,600	 	 	 	38,345	 	 	 	582,945	 	
Trade name	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	74,740	 	 	 	—  	 	 	 	74,740	 	
Other intangibles	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	1,015	 	 	 	—  	 	 	 	1,015	 	
Other assets	  	 	131	 	 	 	—  	 	 	 	131	 	 	 	4,134	 	 	 	3	 	 	 	4,137	 	
Current liabilities assumed	  	 	(7,856	)	 	 	(1,186	)	 	 	(9,042	)	 	 	(76,871	)	 	 	(2,851	)	 	 	(79,722	)	
Deferred income taxes assumed	  	 	2,023	 	 	 	(20	)	 	 	2,003	 	 	 	(5,139	)	 	 	(1,211	)	 	 	(6,350	)	
Notes assumed	  	 	(267	)	 	 	—  	 	 	 	(267	)	 	 	—  	 	 	 	(118	)	 	 	(118	)	
Other noncurrent liabilities assumed	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(2,919	)	 	 	—  	 	 	 	(2,919	)	
Purchase price receivable (payable) in a subsequent period	  	 	3,790	 	 	 	(568	)	 	 	3,222	 	 	 	—  	 	 	 	(175	)	 	 	(175	)	
Stock issued (see Note 3)	  	 	(42,034	)	 	 	(18,007	)	 	 	(60,041	)	 	 	—  	 	 	 	—  	 	 				
Cost of common shares acquired in prior year	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(423	)	 	 	—  	 	 	 	(423	)	
Notes issued	  	 	—  	 	 	 	(1,573	)	 	 	(1,573	)	 	 	—  	 	 	 	(1,699	)	 	 	(1,699	)	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash used in acquisitions, net of cash acquired	  	$	33,979	 	 	$	36,457	 	 	$	70,436	 	 	$	805,475	 	 	$	59,266	 	 	$	864,741	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
We recorded goodwill of $98.9 million during the year ended December 31, 2008, of which $96.2 million is expected to be deductible for income tax purposes. Of the $582.9 million of goodwill recorded for acquisitions completed during the year ended December 31, 2007, $15.5 million is expected to be deductible for income tax purposes.
The primary reason for our acquisition of PYP in 2008, Keystone in 2007 and the other acquisitions made in 2008 and 2007 was to help us further our goal of becoming a one-stop provider for alternative collision replacement parts. These acquisitions enabled us to expand our market presence, expand our product offerings and enter new markets. All or substantially all of the employees of these businesses became our employees following acquisition. These factors contributed to purchase prices that included a significant amount of goodwill.
 
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The following pro forma summary presents the effect of the businesses acquired during the years ended December 31, 2008 and 2007 as though the businesses had been acquired as of January 1, 2007 and 2006, respectively, and is based upon unaudited financial information of the acquired entities (in thousands, except per share amounts):

 	  	Years Ended December 31,	
 	  	2008	  	2007	
Revenue as reported	  	$	1,937,301	  	$	1,126,825	
Revenue of purchased businesses for the period prior to acquisition:	  			  			
Keystone, net of eliminations	  	 	—  	  	 	581,108	
PYP	  	 	103,473	  	 	113,872	
Other acquisitions	  	 	24,973	  	 	71,007	
	  	 	 	  	 	 	
Pro forma revenue	  	$	2,065,747	  	$	1,892,812	
	  	 	 	  	 	 	
Net income as reported	  	$	99,899	  	$	65,901	
Net income of purchased businesses for the period prior to acquisition, including pro forma purchase accounting adjustments:	  			  			
Keystone	  	 	665	  	 	2,075	
PYP	  	 	9,200	  	 	2,175	
Other acquisitions	  	 	3,416	  	 	3,064	
	  	 	 	  	 	 	
Pro forma net income	  	$	113,180	  	$	73,215	
	  	 	 	  	 	 	
Earnings per share-basic	  			  			
As reported	  	$	0.73	  	$	0.58	
Effect of purchased businesses for the period prior to acquisition:	  			  			
Keystone	  	 	—  	  	 	0.01	
PYP	  	 	0.07	  	 	0.01	
Other acquisitions	  	 	0.02	  	 	0.02	
	  	 	 	  	 	 	
Pro forma earnings per share-basic	  	$	0.82	  	$	0.62	
	  	 	 	  	 	 	
Earnings per share-diluted	  			  			
As reported	  	$	0.71	  	$	0.55	
Effect of purchased businesses for the period prior to acquisition:	  			  			
Keystone	  	 	—  	  	 	0.01	
PYP	  	 	0.06	  	 	0.01	
Other acquisitions	  	 	0.02	  	 	0.02	
	  	 	 	  	 	 	
Pro forma earnings per share-diluted	  	$	0.79	  	$	0.59	
	  	 	 	  	 	 	
Unaudited pro forma supplemental information is based upon accounting estimates and judgments which we believe are reasonable. Revenue between LKQ and Keystone has been eliminated. The unaudited pro forma supplemental information also includes purchase accounting adjustments (including a $2.9 million increase in Keystone’s reported cost of goods sold resulting from a write-up of Keystone inventory to fair value and adjustments to depreciation on acquired property and equipment), amortization expense associated with the Keystone trade name, adjustments to interest expense, and the related tax effects. These pro forma results are not necessarily indicative either of what would have occurred if the acquisitions had been in effect for the period presented or of future results.
Note 8. Restructuring and Integration Costs
We have undertaken certain restructuring activities in connection with our acquisition of Keystone. The restructuring plan included the elimination of duplicate headcount at Keystone’s corporate headquarters in Nashville, Tennessee shortly after the closing of the acquisition and the incorporation of our existing aftermarket operations into the Keystone business. We performed an analysis of the overlapping facilities and delivery routes
 
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to identify the facilities and routes that could be combined or closed to eliminate duplication with existing LKQ facilities. Drivers and some facility personnel have been or will be terminated or relocated as a result of the combination of routes and locations. Certain facilities were closed and the inventory was moved to the combined facility. Additionally, Keystone’s accounting system is centralized and located in California, while the LKQ aftermarket’s accounting function is centralized in Ohio. We are in the process of combining the accounting function for all aftermarket operations at the Keystone accounting center in California. The restructuring activities include the migration of the systems utilized by the LKQ aftermarket facilities to the Keystone system. We currently anticipate the combination of operations and migration of systems will be substantially completed during the second quarter of 2009.
To the extent these restructuring activities are associated with Keystone operations, they are being accounted for in accordance with EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination” and are being charged to the cost of the acquisition. Restructuring activities associated with our existing operations are being accounted for in accordance with SFAS No. 146, “Accounting for Costs Associated With Exit or Disposal Activities” and are accordingly being charged to expense.
In connection with the Keystone restructuring activities, we established reserves as detailed below. In accordance with EITF Issue No. 95-3, we finalized our restructuring plans no later than one year from the date of our acquisition of Keystone. If there are settlements of obligations for less than the expected amount, any excess reserves will be reversed with a corresponding decrease in goodwill. Any additional reserves required in the future will be recorded through charges to restructuring expense. Accrued acquisition expenses are included in accrued expenses in the accompanying Consolidated Balance Sheets.
The changes in accrued acquisition expenses directly related to the Keystone acquisition are as follows (in thousands):

 	  	Severance Related
Costs	 	 	Excess
Facility Costs	 	 	Other	 	 	Total	 	
Reserves established	  	$	11,233	 	 	$	2,823	 	 	$	488	 	 	$	14,544	 	
Payments	  	 	(1,727	)	 	 	(85	)	 	 	(488	)	 	 	(2,300	)	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2007	  	$	9,506	 	 	$	2,738	 	 	$	—  	 	 	$	12,244	 	
Reserves adjusted	  	 	(800	)	 	 	(1,007	)	 	 	—  	 	 	 	(1,807	)	
Payments	  	 	(8,432	)	 	 	(827	)	 	 	—  	 	 	 	(9,259	)	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2008	  	$	274	 	 	$	904	 	 	$	—  	 	 	$	1,178	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Severance related costs are expected to be paid through 2009. The excess facility costs are expected to be paid over the remaining terms of the leases through 2013.
Restructuring and integration costs associated with our operations totaled approximately $8.6 million and $0.4 million for the years ended December 31, 2008 and 2007, respectively, and are included in Restructuring expenses on the accompanying Consolidated Statements of Income. These charges include costs to move inventory between facilities, migrate systems, and standardize processes and procedures totaling $4.0 million for the year ended December 31, 2008. We also recognized $2.2 million of costs associated with the future lease commitments for excess facilities due to overlap with acquired Keystone locations and $2.3 million of other costs, including severance and related benefits, employee relocation costs and professional fees for the year ended December 31, 2008.
 
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We have established a reserve for the costs related to the closure of existing facilities. The other restructuring charges are generally expensed and paid in the same reporting period. The changes in accrued restructuring expenses for the year ended December 31, 2008 are as follows (in thousands):

 	  	Excess Facility
Costs	 	 	Facility Relocation
and Closure Costs	 	 	Other	 	 	Total	 	
Balance at December 31, 2007	  	$	—  	 	 	$	—  	 	 	$	—  	 	 	$	—  	 	
Reserves established	  	 	2,240	 	 	 	4,039	 	 	 	2,310	 	 	 	8,589	 	
Payments	  	 	(997	)	 	 	(4,039	)	 	 	(2,298	)	 	 	(7,334	)	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2008	  	$	1,243	 	 	$	—  	 	 	$	12	 	 	$	1,255	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The excess facility costs are expected to be paid over the remaining terms of the leases through 2016.
Note 9. Related Party Transactions
We sublease a portion of our corporate office space to an entity owned by a member of our Board of Directors for a pro rata percentage of the rent that we are charged. The total amounts received from this entity were approximately $45,000, $54,000 and $70,000 during the years ended December 31, 2008, 2007 and 2006, respectively. We also paid this entity approximately $0.4 million during 2007 for consulting fees incurred in connection with our new secured debt facility.
A corporation owned by our Chairman of the Board, who is also one of our principal stockholders, owns private aircraft that we use from time to time for business trips. We reimburse this corporation for out-of-pocket and other related flight expenses, as well as for other direct expenses incurred. We did not utilize the aircraft in 2008, but the total amounts paid to this corporation were approximately $102,000 and $6,400 during each of the years ended December 31, 2007 and 2006, respectively.
In connection with the acquisitions of several businesses, we entered into agreements with several sellers of those businesses, who became stockholders as a result of those acquisitions, for the lease of certain properties used in our operations. Typical lease terms include an initial term of five years, with three five-year renewal options and purchase options at various times throughout the lease periods. We also maintain the right of first refusal concerning the sale of the leased property. Lease payments to an employee who became an officer of the Company after the acquisition of his business were approximately $0.9 million, $0.8 million and $0.8 million during each of the years ended December 31, 2008, 2007 and 2006, respectively.
We believe that the terms of related party transactions described above are comparable to those available from unaffiliated third parties.
Note 10. Retirement Plans
401(k) Plans
We sponsor 401(k) defined contribution plans that cover substantially all of our eligible, full time U.S. employees. Contributions to the plans are made by both the employee and us. Our contributions are based on the level of employee contributions and are subject to certain vesting provisions based upon years of service. Expenses related to these plans totaled approximately $4.0 million, $2.7 million and $2.0 million during 2008, 2007 and 2006, respectively.
Nonqualified Deferred Compensation Plan
We also offer a nonqualified deferred compensation plan to eligible employees who, due to Internal Revenue Service guidelines, may not take full advantage of our 401(k) defined contribution plans. The plan
 
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allows participants to defer eligible compensation, subject to certain limitations. We will match 50% of the portion of the employee’s contributions that does not exceed 6% of the employee’s salary. The deferred compensation, together with our matching contributions and accumulated earnings, is accrued and is payable after retirement or termination of employment, subject to vesting provisions. Participants may also elect to receive amounts deferred in a given year on any plan anniversary five or more years subsequent to the year of deferral. Our matching contributions vest over a four year period and totaled $39,000, $52,000 and $50,000 in 2008, 2007 and 2006, respectively, net of allowable transfers into our 401(k) defined contribution plans. The nonqualified deferred compensation plan is funded under a trust agreement whereby we pay to the trust amounts deferred by employees, together with our match, with such amounts invested in life insurance policies carried to meet the obligations under the deferred compensation plan. The cash surrender value of these policies was approximately $3.9 million and $4.6 million at December 31, 2008 and 2007, respectively, and is included in Other Assets in the accompanying Consolidated Balance Sheets. Total deferred compensation liabilities were approximately $3.7 million and $4.5 million at December 31, 2008 and 2007, respectively, and are included in Accrued payroll-related liabilities and Other Noncurrent Liabilities in the accompanying Consolidated Balance Sheets.
Defined Benefit Pension Plan
Keystone, which we acquired on October 12, 2007, also maintained a qualified defined benefit pension plan which was suspended effective January 1, 1997. We are in the process of terminating the plan and all obligations are expected to be paid out in 2009. The accumulated benefit obligation at December 31, 2008 was $4.7 million, and the fair value of plan assets was $4.0 million. Plan assets are invested in cash, certificates of deposits and overnight securities. The resulting unfunded benefit obligation of $0.7 million is included in accrued payroll-related liabilities in the accompanying Consolidated Balance Sheets at December 31, 2008. Since the plan is being terminated and the amounts are immaterial, we have omitted the more detailed disclosures prescribed by SFAS  No. 158.
Note 11. Earnings per Share
The following table sets forth the computation of earnings per share (in thousands, except per share amounts):

 	  	Year Ended December 31,	
 	  	2008	  	2007	  	2006	
Net income	  	$	99,899	  	$	65,901	  	$	44,395	
	  	 	 	  	 	 	  	 	 	
Denominator for basic earnings per share—Weighted-average shares outstanding	  	 	136,488	  	 	114,161	  	 	105,655	
Effect of dilutive securities:	  			  			  			
Stock options	  	 	4,426	  	 	5,776	  	 	5,822	
Restricted stock	  	 	109	  	 	—  	  	 	—  	
Warrants	  	 	—  	  	 	—  	  	 	156	
	  	 	 	  	 	 	  	 	 	
Denominator for diluted earnings per share— Adjusted weighted-average shares outstanding	  	 	141,023	  	 	119,937	  	 	111,633	
	  	 	 	  	 	 	  	 	 	
Earnings per share, basic	  	$	0.73	  	$	0.58	  	$	0.42	
	  	 	 	  	 	 	  	 	 	
Earnings per share, diluted	  	$	0.71	  	$	0.55	  	$	0.40	

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The following chart sets forth the number of stock options outstanding but not included in the computation of diluted earnings per share because their effect would have been antidilutive (in thousands):

 	  	Year Ended December 31,	
 	  	2008	  	2007	  	2006	
Antidilutive securities:	  		  		  		
Stock options	  	1,404	  	135	  	1,192	
Note 12. Income Taxes
The provision for income taxes consists of the following components (in thousands):

 	  	Year Ended December 31,	
 	  	2008	  	2007	  	2006	
Current:	  			  			  			
Federal	  	$	39,626	  	$	32,435	  	$	21,866	
State	  	 	9,415	  	 	5,326	  	 	2,867	
Foreign	  	 	1,113	  	 	305	  	 	75	
	  	 	 	  	 	 	  	 	 	
	  	 	50,154	  	 	38,066	  	 	24,808	
Deferred	  	 	13,535	  	 	4,304	  	 	3,618	
	  	 	 	  	 	 	  	 	 	
Provision for income taxes	  	$	63,689	  	$	42,370	  	$	28,426	
	  	 	 	  	 	 	  	 	 	
Income taxes have been based on the following components of income before provision for income taxes (in thousands):

 	  	Year Ended December 31,	
 	  	2008	  	2007	  	2006	
Domestic	  	$	158,908	  	$	106,115	  	$	72,588	
Foreign	  	 	4,680	  	 	2,156	  	 	233	
	  	 	 	  	 	 	  	 	 	
	  	$	163,588	  	$	108,271	  	$	72,821	
	  	 	 	  	 	 	  	 	 	
The U.S. federal statutory rate is reconciled to the effective tax rate as follows:

 	  	Year Ended December 31,	 	
 	  	2008	 	 	2007	 	 	2006	 	
U.S. federal statutory rate	  	35.0	%	 	35.0	%	 	35.0	%	
State income taxes, net of federal tax impact	  	4.2	 	 	3.8	 	 	3.6	 	
Non-deductible expenses	  	0.5	 	 	0.2	 	 	0.2	 	
Non-taxable life insurance proceeds	  	—  	 	 	(0.3	)	 	—  	 	
State tax credits	  	(0.7	)	 	—  	 	 	—  	 	
Valuation allowances	  	0.1	 	 	(0.4	)	 	0.3	 	
Changes in uncertain tax positions	  	0.6	 	 	0.1	 	 	—  	 	
Tax benefit related to closure of prior years’ tax audits	  	(0.3	)	 	—  	 	 	(1.0	)	
Other, net	  	(0.5	)	 	0.7	 	 	0.9	 	
	  	 	 	 	 	 	 	 	 	
Effective tax rate	  	38.9	%	 	39.1	%	 	39.0	%	
	  	 	 	 	 	 	 	 	 	
We do not provide for U.S. federal income taxes on the undistributed earnings of our foreign subsidiaries because such earnings are reinvested and, in our opinion, will continue to be reinvested indefinitely.
 
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In 2008, we identified several state tax credits for which we were eligible and recognized a tax benefit of approximately $1.2 million in our income tax provision for 2008.
The significant components of our deferred tax assets and liabilities are as follows (in thousands):

 	  	December 31,	 	
 	  	2008	 	 	2007	 	
Deferred Tax Assets:	  				 				
Accrued expenses and reserves	  	$	12,446	 	 	$	6,829	 	
Inventory	  	 	8,288	 	 	 	8,433	 	
Accounts receivable	  	 	6,462	 	 	 	4,357	 	
Interest rate swaps	  	 	5,653	 	 	 	—  	 	
Net operating loss carryforwards	  	 	3,141	 	 	 	2,187	 	
Stock based compensation	  	 	3,089	 	 	 	2,346	 	
Unrecognized tax benefits	  	 	3,056	 	 	 	865	 	
Nonqualified deferred compensation	  	 	2,025	 	 	 	2,217	 	
Keystone acquisition costs	  	 	1,052	 	 	 	2,413	 	
Long term incentive plan	  	 	373	 	 	 	1,427	 	
Severance and change in control payments	  	 	98	 	 	 	11,798	 	
Other	  	 	695	 	 	 	1,123	 	
	  	 	 	 	 	 	 	 	
	  	 	46,378	 	 	 	43,995	 	
Less valuation allowance	  	 	(883	)	 	 	(662	)	
	  	 	 	 	 	 	 	 	
Total deferred tax assets	  	$	45,495	 	 	$	43,333	 	
	  	 	 	 	 	 	 	 	
Deferred Tax Liabilities:	  				 				
Trade name	  	$	27,843	 	 	$	28,653	 	
Property and equipment	  	 	20,844	 	 	 	10,283	 	
Goodwill and other intangible assets	  	 	19,582	 	 	 	9,116	 	
Prepaid expenses	  	 	830	 	 	 	983	 	
Other	  	 	270	 	 	 	1,096	 	
	  	 	 	 	 	 	 	 	
Total deferred tax liabilities	  	$	69,369	 	 	$	50,131	 	
	  	 	 	 	 	 	 	 	
Net deferred tax liability	  	$	(23,874	)	 	$	(6,798	)	
	  	 	 	 	 	 	 	 	
Deferred tax assets and liabilities are reflected on our consolidated balance sheets as follows (in thousands):

 	  	December 31,	
 	  	2008	  	2007	
Current deferred tax assets	  	$	19,644	  	$	18,809	
Noncurrent deferred tax liabilities	  	 	43,518	  	 	25,607	
At December 31, 2008 and 2007, we had net operating loss carryforwards for certain of our state tax jurisdictions, the tax benefits of which total approximately $3.1 million and $2.2 million, respectively. Additionally, at December 31, 2008, we had tax credit carryforwards of $0.7 million related to certain of our state tax jurisdictions. A valuation allowance has been established for a portion of these deferred tax assets. The net operating loss carryforwards expire over the period from 2009 through 2028, while $0.6 million of the tax credit carryforwards have no expiration date. Realization of these deferred tax assets is dependent on the generation of sufficient taxable income prior to the expiration dates. Based on historical and projected operating results, management believes that it is more likely than not that earnings will be sufficient to realize the deferred tax assets for which valuation allowances have not been provided. While we expect to realize the deferred tax assets, net of valuation allowances, changes in estimates of future taxable income or in tax laws may alter this expectation.
 
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A reconciliation of the beginning and ending amount of gross unrecognized tax benefits under FIN 48 is as follows (in thousands):

 	  	2008	 	 	2007	
Balance at January 1	  	$	5,857	 	 	$	3,324	
Additions based on tax positions related to the current year	  	 	1,419	 	 	 	422	
Additions for tax positions of prior years	  	 	416	 	 	 	—  	
Reductions for tax positions of prior years	  	 	(119	)	 	 	—  	
Lapse of statute of limitations	  	 	(577	)	 	 	—  	
Increase related to acquisition of Keystone	  	 	953	 	 	 	2,111	
	  	 	 	 	 	 	 	
Balance at December 31	  	$	7,949	 	 	$	5,857	
	  	 	 	 	 	 	 	
As of December 31, 2008 and 2007, we have accumulated interest and penalties included in gross unrecognized tax benefits of $1.4 million and $0.8 million, respectively. Of these amounts, $0.4 million and $0.1 million were recorded through the income tax provision during 2008 and 2007, respectively. We have a deferred tax asset of $0.3 million related to the accumulated interest and penalties balances as of December 31, 2008. The amount of the unrecognized tax benefits, which if resolved favorably (in whole or in part) would reduce our effective tax rate, is approximately $4.9 million at December 31, 2008.
The $3.1 million of total gross unrecognized tax benefits associated with our acquisition of Keystone during 2007 reduced the net assets of Keystone and was recorded as an adjustment to goodwill. Of this amount, $0.5 million relates to the accrual for interest and penalties. Adjustments to unrecognized tax benefits for post-acquisition activity have been and will be recorded in the consolidated statements of income.
During the twelve months beginning January 1, 2009, it is reasonably possible that we will reduce gross unrecognized tax benefits by up to approximately $2.1 million, of which approximately $1.0 million would impact our effective tax rate, primarily as a result of the expiration of certain statutes of limitations.
Tax years after 2004 remain subject to examination by the Internal Revenue Service (“IRS”). We are currently the subject of income tax audits by several states for prior tax years as well as an audit by the IRS for Keystone’s 2005 and 2006 tax years. Adjustments from such audits, if any, are not expected to have a material effect on our Consolidated Financial Statements.
 
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Note 13. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) are as follows (in thousands):

 	  	Foreign
Currency
Translation	 	 	Unrealized Gain
on Pension Plan	 	 	Unrealized Loss
on Interest Rate
Swaps	 	 	Unrealized (Loss)
Gain on
Securities	 	 	Accumulated
Other
Comprehensive
Income (Loss)	 	
Balance at January 1, 2006	  	$	(56	)	 	$	—  	 	 	$	—  	 	 	$	1,351	 	 	$	1,295	 	
Pretax loss	  	 	(23	)	 	 	—  	 	 	 	—  	 	 	 	(336	)	 	 	(359	)	
Income tax benefit	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	122	 	 	 	122	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2006	  	 	(79	)	 	 	—  	 	 	 	—  	 	 	 	1,137	 	 	 	1,058	 	
Pretax income	  	 	698	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	698	 	
Reversal of unrealized gain	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(1,787	)	 	 	(1,787	)	
Reversal of deferred income taxes	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	650	 	 	 	650	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2007	  	 	619	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	619	 	
Pretax (loss) income	  	 	(5,686	)	 	 	236	 	 	 	(14,494	)	 	 	—  	 	 	 	(19,944	)	
Income tax (expense) benefit	  	 	—  	 	 	 	(92	)	 	 	5,653	 	 	 	—  	 	 	 	5,561	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2008	  	$	(5,067	)	 	$	144	 	 	$	(8,841	)	 	$	—  	 	 	$	(13,764	)	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Note 14. Long Term Incentive Plan
On January 26, 2006, our Board of Directors approved, and our stockholders approved at the annual meeting on May 8, 2006, the LKQ Corporation Long Term Incentive Plan. The purpose of the Long Term Incentive Plan is to offer certain key employees the opportunity to receive long-term performance rewards. Each participant will be entitled to a performance award for each performance period under the plan. Performance periods will begin on January 1 and end on December 31 of the third calendar year thereafter. Performance awards will be equal to the participant’s base salary (at the end of the applicable performance period) multiplied by an “Award Percentage.” A participant’s Award Percentage is determined by three components: the growth over the performance period of each of the Company’s earnings per share, total revenue, and return on equity. The Compensation Committee of our Board of Directors will determine for each participant the range of Award Percentages based on different growth scenarios of the components. One half of any performance award achieved is payable promptly after the end of the performance period. A participant must be an employee of the Company throughout the performance period to be eligible for the first 50% payment. The other half of the performance award is deferred and vests in three equal installments on each one year anniversary of the end of the performance period. A participant must be an employee on each such anniversary date to be eligible for the respective deferred payment, unless the participant is not an employee as a result of death, total disability or normal retirement at age 65, in which case the participant (or his or her estate) will be entitled to all of the deferred payments upon such death, disability or retirement. Interest on the deferred portion of the performance award will accrue at the prime rate and be payable to the participant at the same time as the deferred installments are paid. We have recorded expense related to this plan totaling approximately $1.1 million, $2.1 million and $1.8 million during the years ended December 31, 2008, 2007 and 2006, respectively.
Note 15. Fair Value Measurements
SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers 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 unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
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We use the market approach to value our financial assets and liabilities, and there were no changes in valuation techniques during the year ended December 31, 2008. The following table presents information about our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2008 (in thousands):

 	  	Balance as
of December 31,
2008	  	Fair Value Measurements as of December 31, 2008	
	  		  	Level 1	  	Level 2	  	Level 3	
Assets:	  			  			  			  			
Cash equivalents	  	$	57,127	  	$	57,127	  	$	—  	  	$	—  	
Cash surrender value of life insurance	  	 	3,862	  	 	—  	  	 	3,862	  	 	—  	
	  	 	 	  	 	 	  	 	 	  	 	 	
Total Assets	  	$	60,989	  	$	57,127	  	$	3,862	  	$	—  	
	  	 	 	  	 	 	  	 	 	  	 	 	
Liabilities:	  			  			  			  			
Deferred compensation liabilities	  	$	3,688	  	$	—  	  	$	3,688	  	$	—  	
Interest rate swaps	  	 	14,494	  	 	—  	  	 	14,494	  	 	—  	
	  	 	 	  	 	 	  	 	 	  	 	 	
Total Liabilities	  	$	18,182	  	$	—  	  	$	18,182	  	$	—  	
	  	 	 	  	 	 	  	 	 	  	 	 	
Note 16. Selected Quarterly Data (unaudited)
The following table represents unaudited selected quarterly financial data for the two years ended December 31, 2008. The operating results for any quarter are not necessarily indicative of the results for any future period.

 	  	Quarter Ended	
 	  	Mar. 31	  	Jun. 30	  	Sep. 30	  	Dec. 31	
 	  	(In thousands, except per share data)	
2007(1)	  			  			  			  			
Revenue	  	$	235,318	  	$	233,278	  	$	243,495	  	$	414,735	
Gross margin	  	 	107,096	  	 	105,083	  	 	108,457	  	 	185,114	
Operating income	  	 	27,262	  	 	26,642	  	 	25,591	  	 	43,162	
Net income	  	 	15,794	  	 	14,016	  	 	14,559	  	 	21,532	
Earnings per share:(2)	  			  			  			  			
Basic earnings per share	  	 	0.15	  	 	0.13	  	 	0.13	  	 	0.16	
Diluted earnings per share	  	 	0.14	  	 	0.12	  	 	0.13	  	 	0.16	

 	  	Quarter Ended	
 	  	Mar. 31	  	Jun. 30	  	Sep. 30	  	Dec. 31	
 	  	(In thousands, except per share data)	
2008(3)	  			  			  			  			
Revenue	  	$	491,908	  	$	484,392	  	$	490,701	  	$	470,300	
Gross margin	  	 	223,314	  	 	219,708	  	 	215,915	  	 	197,732	
Operating income	  	 	61,508	  	 	58,414	  	 	49,958	  	 	27,816	
Net income	  	 	30,878	  	 	30,989	  	 	25,068	  	 	12,964	
Earnings per share:(2)	  			  			  			  			
Basic earnings per share	  	 	0.23	  	 	0.23	  	 	0.18	  	 	0.09	
Diluted earnings per share	  	 	0.22	  	 	0.22	  	 	0.18	  	 	0.09	

(1)	Includes the results of operations of Keystone since our acquisition of Keystone on October 12, 2007.	
 
(2)	The sum of the quarters may not equal the total of the respective year’s earnings per share on either a basic or diluted basis due to changes in weighted average shares outstanding throughout the year.	
 
(3)	Includes the results of operations of PYP since our acquisition of PYP on August 25, 2008.	
 
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ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	
None.
 
ITEM 9A.	CONTROLS AND PROCEDURES	
Evaluation of Disclosure Controls and Procedures
As of December 31, 2008, the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of LKQ Corporation’s management, including our Chief Executive Officer and Chief Financial Officer, of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective to ensure that the Company is able to collect, process and disclose, within the required time periods, the information we are required to disclose in the reports we file with the Securities and Exchange Commission.
Report of Management on Internal Control over Financial Reporting dated February 26, 2009
Management of LKQ Corporation and subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Company’s Board of Directors.
Based on this assessment, management determined that, as of December 31, 2008, the Company maintained effective internal control over financial reporting. Deloitte & Touche LLP, independent registered public accounting firm, who audited and reported on the consolidated financial statements of the Company included in this report, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2008.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of LKQ Corporation:
We have audited the internal controls over financial reporting of LKQ Corporation and subsidiaries (the “Company”) as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule of the Company as of and for the year ended December 31, 2008 and our report dated February 26, 2009 expressed an unqualified opinion on those financial statements and financial statement schedule.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 26, 2009
 
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ITEM 9B.	OTHER INFORMATION	
None.
 
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PART III
 
ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	
Directors
The information appearing under the caption “Election of our Board of Directors” in our Proxy Statement for the Annual  Meeting of Stockholders to be held May 4, 2009 (the “Proxy Statement”) is incorporated herein by reference.
Executive Officers
Our executive officers, their ages at December 31, 2008, and their positions with us are set forth below. Our executive officers are elected by and serve at the discretion of our Board of Directors.

Name	  	Age	  	Position	
Joseph M. Holsten	  	56	  	President, Chief Executive Officer and Director	
Mark T. Spears	  	51	  	Executive Vice President and Chief Financial Officer	
Walter P. Hanley	  	42	  	Senior Vice President—Development, Associate General Counsel and Assistant Secretary	
Victor M. Casini	  	46	  	Senior Vice President, General Counsel and Secretary	
Robert L. Wagman	  	44	  	Vice President—Insurance Services and Aftermarket Operations	
Frank P. Erlain	  	53	  	Vice President—Finance and Controller	
Joseph M. Holsten joined us in November 1998 as our President and Chief Executive Officer. He was elected to our Board of Directors in February 1999. Prior to joining us, Mr. Holsten held various positions of increasing responsibility with the North American and International operations of Waste Management, Inc. for approximately 17 years. From February 1997 until July 1998, Mr. Holsten served as Executive Vice President and Chief Operating Officer of Waste Management, Inc. From July 1995 until February 1997, he served as Chief Executive Officer of Waste Management International, plc where his responsibility was to streamline operating activities. Prior to working for Waste Management, Mr. Holsten was staff auditor at a public accounting firm.
Mark T. Spears joined us in July 1999 as our Senior Vice President and Chief Financial Officer. In December 2005, he became our Executive Vice President and Chief Financial Officer. From November 1997 until June 1998, Mr. Spears served as Vice President, Controller and Principal Accounting Officer of Waste Management, Inc. As a member of a newly-installed executive management team, Mr. Spears helped Waste Management work through certain difficulties related to the restatement of its financial statements through the period ended September 30, 1997. Upon the merger of Waste Management and USA Waste Services Inc. in July 1998, Mr. Spears continued to serve as a Vice President until June 1999. From late 1988 to November 1997, Mr. Spears held various positions of increasing responsibility in the United States and Europe with Waste Management and its subsidiaries. Prior to his employment with Waste Management, Mr. Spears, a certified public accountant, worked in public accounting for approximately nine years.
Walter P. Hanley joined us in December 2002 as our Vice President of Development, Associate General Counsel and Assistant Secretary. In December 2005, he became our Senior Vice President of Development. Mr. Hanley served as Senior Vice President, General Counsel and Secretary of Emerald Casino, Inc., an owner of a license to operate a riverboat casino in the State of Illinois, from June 1999 until August 2002. Mr. Hanley served as Senior Vice President, General Counsel and Secretary of Blue Chip Casino, Inc., an owner and operator of a riverboat gaming vessel in Michigan City, Indiana, from July 1996 until November 1999. Mr. Hanley served as Vice President and Associate General Counsel of Flynn Enterprises, Inc., a venture capital, hedging and consulting firm that is wholly owned by our Chairman of the Board, Donald F. Flynn, from May 1995 until February 1998 and as Associate General Counsel of Discovery Zone, Inc., an operator and franchisor of family entertainment centers, from March 1993 until May 1995.
 
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Prior to March 1993, Mr. Hanley practiced corporate and securities law with the law firm of Bell, Boyd & Lloyd LLP in Chicago, Illinois.
Victor M. Casini has been our Vice President, General Counsel and Secretary since our inception in February 1998. He was elected Senior Vice President in March 2008. Mr. Casini also has been since July 1992 Executive Vice President and General Counsel of Flynn Enterprises, Inc. Mr. Casini currently divides his time between his position with us and with Flynn Enterprises, working approximately 75% for us and 25% for Flynn Enterprises. Mr. Casini served as Senior Vice President, General Counsel and Secretary of Discovery Zone from July 1992 until May 1995. Prior to July 1992, Mr. Casini practiced corporate and securities law with the law firm of Bell, Boyd & Lloyd LLP in Chicago, Illinois for more than five years.
Robert L. Wagman started in our industry as an Account Executive for Copart Auto Auctions, a processor and seller of salvage vehicles through auctions, from 1987 to April 1995. From April 1995 to October 1998, Mr. Wagman served as the Outside Sales Manager of Triplett Auto Parts, Inc., a recycled auto parts company that we acquired in July 1998. From October 1998, Mr. Wagman handled our relationships with insurance companies, and from February 2004, handled our aftermarket operations, until he was elected Vice President of Insurance Services and Aftermarket Operations in August 2005.
Frank P. Erlain has been our Vice President—Finance and Controller since our inception in February 1998. Mr. Erlain served as a Vice President of Flynn Enterprises, Inc. from 1995 to 1999. Prior to joining Flynn Enterprises, Mr. Erlain served as Vice President and Controller of Discovery Zone, Inc. from September 1992 until May 1995 when Viacom Inc. acquired ownership and management control of Discovery Zone. Mr. Erlain remained as part of a transition team at Discovery Zone until August 1995. Mr. Erlain served as Controller of Peterson Consulting from 1990 until 1992, and as Controller/Treasurer (from 1985 to 1988) and Director, Information Services (from 1988 to 1990) for Hammacher Schlemmer & Co., a national cataloger and retailer. Mr. Erlain joined Cadlinc, Inc., a start-up firm serving the computer-aided manufacturing market, as Controller in 1984. Prior to 1984, Mr. Erlain, a certified public accountant, worked in public accounting for more than nine years.
Code of Ethics
A copy of our Code of Ethics for Senior Financial Officers is available free of charge through our website at www.lkqcorp.com.
Section 16 Compliance
Information appearing under the caption “Other Information—Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement is incorporated herein by reference.
Audit Committee
Information appearing under the caption “Election of Our Board of Directors—Meetings and Committees of the Board—Audit Committee” in the Proxy Statement is incorporated herein by reference.
 
ITEM 11.	EXECUTIVE COMPENSATION	
Information appearing under the captions “Election of Our Board of Directors—Director Compensation Table,” “Compensation Discussion and Analysis,” “Election of Our Board of Directors—Compensation Committee Interlocks and Insider Participation” and “Compensation Tables” in the Proxy Statement is incorporated herein by reference.
 
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ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	
Information appearing under the caption “Other Information—Principal Stockholders” in the Proxy Statement and appearing under the caption “Equity Compensation Plan Information” in Item 5 of this Annual Report is incorporated herein by reference.
 
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	
Information appearing under the captions “Other Information—Certain Transactions” and “Election of Our Board of Directors” in the Proxy Statement is incorporated herein by reference.
 
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	
Information appearing under the caption “Appointment of Our Independent Registered Public Accounting Firm—Audit Fees and Non-Audit Fees” in the Proxy Statement is incorporated herein by reference.
 
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PART IV
 
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	
(a)(1) Financial Statements
Reference is made to the information set forth in Part II, Item 8 of this Report, which information is incorporated herein by reference.
(a)(2) Financial Statement Schedules
Other than as set forth below, all schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted because they are not required under the related instructions, are not applicable, or the information has been provided in the consolidated financial statements or the notes thereto.
Schedule II—Valuation and Qualifying Accounts and Reserves

Descriptions	  	Balance at
Beginning of
Period	  	Additions
Charged to
Costs and
Expenses	  	Acquisitions and
Other	  	Deductions	 	 	Balance at End
of Period	
 	  	(in thousands)	
ALLOWANCE FOR DOUBTFUL ACCOUNTS:	  		  		  		  			 		
Year ended December 31, 2006	  	2,090	  	2,144	  	320	  	(1,976	)	 	2,578	
Year ended December 31, 2007	  	2,578	  	2,499	  	1,460	  	(2,208	)	 	4,329	
Year ended December 31, 2008	  	4,329	  	6,948	  	648	  	(6,168	)	 	5,757	
ALLOWANCE FOR ESTIMATED RETURNS, DISCOUNTS & ALLOWANCES:	  		  		  		  			 		
Year ended December 31, 2006	  	3,100	  	149,008	  	346	  	(148,447	)	 	4,007	
Year ended December 31, 2007	  	4,007	  	215,525	  	2,499	  	(214,500	)	 	7,531	
Year ended December 31, 2008	  	7,531	  	409,778	  	2,544	  	(408,684	)	 	11,169	
(a)(3) Exhibits
The exhibits to this report are listed in Item 15(b) of this Report. Included in the exhibits listed therein are the following exhibits which constitute management contracts or compensatory plans or arrangements:

10.3	  	LKQ Corporation Amended and Restated Stock Option and Compensation Plan for Non-Employee Directors, as amended.	
		
10.4	  	LKQ Corporation 1998 Equity Incentive Plan, as amended.	
		
10.5	  	LKQ Corporation 401(k) Plus Plan dated August 1, 1999.	
		
10.6	  	Amendment to LKQ Corporation 401(k) Plus Plan.	
		
10.7	  	Trust for LKQ Corporation 401(k) Plus Plan.	
		
10.8	  	LKQ Corporation Employees’ Retirement Plan, as amended and restated as of September 1, 2008.	
		
10.9	  	Amendment No. 1 effective as of January 1, 2009 to LKQ Corporations Employees’ Retirement Plan.	
		
10.10	  	Trust Agreement for LKQ Corporation Employees’ Retirement Plan.	
		
10.11	  	LKQ Corporation 401(k) Plus Plan II as amended and restated effective as of January 1, 2008.	
 
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10.12	  	Form of Award Agreement dated January 14, 2005 between LKQ Corporation and optionees.	
		
10.13	  	Form of Notice to Optionees dated January 10, 2005.	
		
10.14	  	Form of Indemnification Agreements between directors and officers of LKQ Corporation and LKQ Corporation.	
		
10.15	  	Form of LKQ Corporation Executive Officer 2007 Bonus Program (Corporate).	
		
10.16	  	Form of LKQ Corporation Executive Officer 2007 Bonus Program (Regional).	
		
10.17	  	Form of LKQ Corporation Executive Officer 2008 Bonus Program (Corporate).	
		
10.18	  	Form of LKQ Corporation Executive Officer 2008 Bonus Program (Other).	
		
10.19	  	LKQ Corporation Long Term Incentive Plan.	
		
10.20	  	Form of LKQ Corporation Restricted Stock Agreement.	
		
10.21	  	Consulting Agreement dated as of January 11, 2008 between LKQ Corporation and Joseph M. Holsten.	
(b) Exhibits

3.1(i)	  	Certificate of Incorporation of LKQ Corporation dated February 13, 1998, and as amended on May 20, 1998, June 15, 1998, August 17, 2000, and February 22, 2001 (incorporated herein by reference to Exhibit 3.1(i) to the Company’s Registration Statement on Form S-1, Registration No. 333-107417).	
		
3.1(ii)	  	Amendment to Certificate of Incorporation filed on October 8, 2003 (incorporated herein by reference to Exhibit 3.1 (ii) to the Company’s report on Form 10-K for the fiscal year ended December 31, 2003).	
		
3.1(iii)	  	Conformed copy of Certificate of Incorporation of LKQ Corporation, as amended to date (incorporated herein by reference to Exhibit 3.1 (iii) to the Company’s report on Form 10-K for the fiscal year ended December 31, 2003).	
		
3.2	  	Amended and Restated Bylaws of LKQ Corporation (incorporated herein by reference to Exhibit 99.1 to the Company’s report on Form 8-K filed with the SEC on March 19, 2008).	
		
4.1	  	Specimen of common stock certificate (incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1, Registration No. 333-107417).	
		
4.2	  	Credit Agreement, dated as of October 12, 2007, among LKQ Corporation and LKQ Delaware LLP, as borrowers, Lehman Brothers Inc. and Deutsche Bank Securities Inc., as joint lead arrangers and joint bookrunners, Deutsche Bank Securities Inc, as syndication agent, Lehman Commercial Paper Inc., as administrative agent, Deutsche Bank AG New York Branch, as US dual currency RCF agent, and Deutsche Bank AG Canada Branch, as Canadian Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 8-K filed with the SEC on October 18, 2007).	
		
4.3	  	First Amendment to Credit Agreement dated as of October 26, 2007, among LKQ Corporation and LKQ Delaware LLP, as borrowers, and the lenders party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 8-K filed with the SEC on November 1, 2007).	
		
10.1	  	Office Lease for 120 North LaSalle Street, Suite 3300, Chicago, Illinois by and between the Prudential Insurance Company of America, as Landlord, and LKQ Corporation, as Tenant, dated as of February 18, 2004 (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 10-Q for the quarter ended March 31, 2004).	
		
10.2	  	Amendment dated January 20, 2009 to Office Lease dated as of February 18, 2004.	
		
10.3	  	LKQ Corporation Amended and Restated Stock Option and Compensation Plan for Non-Employee Directors, as amended (incorporated herein by reference to Exhibit 10.5 to the Company’s report on the Form 10-Q filed with the SEC on November 7, 2008).	
 
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10.4	  	LKQ Corporation 1998 Equity Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1, Registration No. 333-128152).	
		
10.5	  	LKQ Corporation 401(k) Plus Plan dated August 1, 1999 (incorporated herein by reference to Exhibit 10.23 to the Company’s Registration Statement on Form S-1, Registration No. 333-107417).	
		
10.6	  	Amendment to LKQ Corporation 401(k) Plus Plan (incorporated herein by reference to Exhibit 10.24 to the Company’s Registration Statement on Form S-1, Registration No. 333-107417).	
		
10.7	  	Trust for LKQ Corporation 401(k) Plus Plan (incorporated herein by reference to Exhibit 10.25 to the Company’s Registration Statement on Form S-1, Registration No. 333-107417).	
		
10.8	  	LKQ Corporation Employees’ Retirement Plan, as amended and restated as of September 1, 2008 (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 10-Q filed with the SEC on November 7, 2008).	
		
10.9	  	Amendment No. 1 effective as of January 1, 2009 to LKQ Corporation Employees’ Retirement Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s report on Form 10-Q filed with the SEC on November 7, 2008).	
		
10.10	  	Trust Agreement for LKQ Corporation Employees’ Retirement Plan.	
		
10.11	  	LKQ Corporation 401(k) Plus Plan II, as amended and restated effective as of January 1, 2008.	
		
10.12	  	Form of Award Agreement dated January 14, 2005 between LKQ Corporation and optionees (incorporated herein by reference to Exhibit 99.1 to the Company’s report on Form 8-K filed with the SEC on January 11, 2005).	
		
10.13	  	Form of Notice to Optionees dated January 10, 2005 (incorporated herein by reference to Exhibit 99.2 to the Company’s report on Form 8-K filed with the SEC on January 11, 2005).	
		
10.14	  	Form of Indemnification Agreement between directors and officers of LKQ Corporation and LKQ Corporation (incorporated herein by reference to Exhibit 10.30 to the Company’s Registration Statement on Form S-1, Registration No. 333-107417).	
		
10.15	  	Form of LKQ Corporation Executive Officer 2007 Bonus Program (Corporate) (incorporated herein by reference to Exhibit 99.1 to the Company’s report on Form 8-K filed with the SEC on February 27, 2007).	
		
10.16	  	Form of LKQ Corporation Executive Officer 2007 Bonus Program (Regional) (incorporated herein by reference to Exhibit 99.2 to the Company’s report on Form 8-K filed with the SEC on February 27, 2007).	
		
10.17	  	Form of LKQ Corporation Executive Officer 2008 Bonus Program (Corporate) (incorporated herein by reference to Exhibit 99.1 to the Company’s report on Form 8-K filed with the SEC on April 8, 2008).	
		
10.18	  	Form of LKQ Corporation Executive Officer 2008 Bonus Program (Other) (incorporated herein by reference to Exhibit 99.2 to the Company’s report on Form 8-K filed with the SEC on April 8, 2008).	
		
10.19	  	LKQ Corporation Long Term Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 8-K filed with the SEC on May 12, 2006).	
		
10.20	  	Form of LKQ Corporation Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 8-K filed with the SEC on January 17, 2008).	
		
10.21	  	Consulting Agreement dated as of January 11, 2008 between LKQ Corporation and Joseph M. Holsten (incorporated herein by reference to Exhibit 10.2 to the Company’s report on Form 8-K filed with the SEC on January 17, 2008).	
 
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10.22	  	ISDA 2002 Master Agreement between JP Morgan Chase Bank, National Association and LKQ Corporation, and related Schedule (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 10-Q filed with the SEC on May 9, 2008).	
		
10.23	  	ISDA 2002 Master Agreement between Deutsche Bank AG and LKQ Corporation, and related Schedule (incorporated herein by reference to Exhibit 10.3 to the Company’s report on Form 10-Q filed with the SEC on November 7, 2008).	
		
10.24	  	Stock Purchase Agreement dated as of August 15, 2008, among LKQ Corporation, Glenn C. McElroy, Phillip B. McElroy, Thomas C. Hutton, John L. Neu, Robert T. Neu and Jeffery P. Neu, and Pick-Your-Part Auto Wrecking (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 8-K filed with the SEC on August 21, 2008).	
		
12.1	  	Computation of Ratio of Earnings to Fixed Charges.	
		
21.1	  	List of subsidiaries, jurisdictions and assumed names.	
		
23.1	  	Consent of Deloitte & Touche LLP.	
		
31.1	  	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
		
31.2	  	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
		
32.1	  	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
		
32.2	  	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
 
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 27, 2009.

LKQ CORPORATION	
		
By:	 	/ S /    J OSEPH M. H OLSTEN        	
	 	Joseph M. Holsten
President and Chief Executive Officer	
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 27, 2009.

Signature	  	Title	
Principal Executive Officer:	  		
		
/s/    J OSEPH M. H OLSTEN        
Joseph M. Holsten	  	President and Chief Executive Officer	
		
Principal Financial Officer:	  		
		
/s/    M ARK T. S PEARS        
Mark T. Spears	  	Executive Vice President and Chief Financial Officer	
		
Principal Accounting Officer:	  		
		
/s/     F RANK P. E RLAIN        
Frank P. Erlain	  	Vice President—Finance and Controller	
		
A Majority of the Directors:	  		
		
/s/    A. C LINTON A LLEN        
A. Clinton Allen	  	Director	
		
/s/    R OBERT M. D EVLIN        
Robert M. Devlin	  	Director	
		
/s/    D ONALD F. F LYNN        
Donald F. Flynn	  	Director	
		
/s/    K EVIN F. F LYNN        
Kevin F. Flynn	  	Director	
		
/s/    R ONALD G. F OSTER        
Ronald G. Foster	  	Director	
		
/s/    J OSEPH M. H OLSTEN        
Joseph M. Holsten	  	Director	
		
/s/    P AUL M. M EISTER        
Paul M. Meister	  	Director	
		
/s/    J OHN F. O’B RIEN        
John F. O’Brien	  	Director	
		
/s/    W ILLIAM M. W EBSTER , IV        
William M. Webster, IV	  	Director	
 
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EXHIBIT 10.2
AMENDMENT TO OFFICE LEASE
THIS AMENDMENT TO OFFICE LEASE (this “ Amendment ”) is made as of the 20th day of January, 2009, by and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA , a New Jersey corporation (“ Landlord ”), and LKQ CORPORATION , a Delaware corporation (“ Tenant ”).
W I T N E S S E T H :
WHEREAS , Landlord and Tenant entered into that certain Office Lease dated February 18, 2004 (the “ Lease ”), demising certain space more particularly described therein in the building located at 120 N. LaSalle Street, Chicago, Illinois;
WHEREAS , by notice dated October 7, 2008, Tenant exercised its termination right under Article 36 of the Lease and, accordingly, the Expiration Date of the Lease is July 31, 2009; and
WHEREAS , Landlord and Tenant desire to reinstate and amend the Lease as herein provided.
NOW, THEREFORE , in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant hereby amend the Lease as follows:
1. Definitions . Unless the context otherwise requires, any capitalized term used herein shall have its respective meaning as set forth in the Lease.
2. Integration of Amendment and Lease . This Amendment and the Lease shall be deemed to be, for all purposes, one instrument. In the event of any conflict between the terms and provisions of this Amendment and the terms and provisions of the Lease, the terms and provisions of this Amendment shall, in all instances, control and prevail.
3. Reinstatement . Tenant and Landlord hereby agree that the termination referred in the recitals above is hereby rescinded and that the Lease, as amended hereby, shall continue in full force and effect in accordance with its terms and conditions.
4. Early Termination . Notwithstanding anything contained in the Lease to the contrary, Landlord and Tenant agree that the Expiration Date of the Lease shall be July 31, 2011, unless the Lease shall sooner terminate as expressly provided therein and herein.
5. Base Rent . Tenant shall continue to pay Base Rent in accordance with the Lease until July 31, 2009. Then, effective as of August 1, 2009, the Base Rent table set forth in the Lease is hereby deleted and replaced in its entirety with the following:

Period	  	Annual Base Rent	  	Monthly Base Rent	
8/1/09 – 7/31/10	  	$	266,175.00	  	$	22,181.25	
8/1/10 – 7/31/11	  	$	274,160.28	  	$	22,846.69	

Accordingly, from and after August 1, 2009, Base Rent shall be paid in the amounts set forth above in accordance with Article 4 of the Lease.
6. Taxes and Expenses . Tenant shall continue to pay Tenant’s Share of Taxes and Expenses in accordance with the terms and conditions of the Lease.
7. Condition of Premises . Tenant acknowledges that it is in possession of the Premises and that it accepts the Premises in their “as is” condition. No agreement of Landlord to alter, remodel, decorate, clean or improve the Premises or the Building (or to provide Tenant with any credit or allowance for the same), and no representation regarding the condition of the Premises or the Building, have been made by or on behalf of Landlord or relied upon by Tenant, except as may be expressly provided in the Lease.
8. No Renewal Option . Article 37 of the Lease is hereby deleted in its entirety and shall be of no further force or effect.
9. No Broker . Tenant represents that Tenant has not dealt with any broker in connection with this Amendment other than Transwestern Commercial Services and agrees to indemnify and hold Landlord harmless from all damages, liability and expense (including reasonable attorneys’ fees) arising from any claims or demands of any other brokers or finders for any commission alleged to be due such brokers or finders in connection with their participation in the negotiation with Tenant of this Amendment. Landlord shall be responsible for the payment of a commission to Transwestern Commercial Services in connection with this Amendment pursuant to a separate agreement with Transwestern Commercial Services.
10. OFAC Certification . Tenant certifies that:
(a) It is not acting, directly or indirectly, for or on behalf of any person, group, entity or nation named by any Executive Order or the United States Treasury Department as a terrorist, “Specially Designated National and Blocked Person,” or other banned or blocked person, entity, nation or transaction pursuant to any law, order, rule or regulation that is enforced or administered by the Office of Foreign Assets Control; and
(b) It is not engaged in this transaction, directly or indirectly, on behalf of, or instigating or facilitating this transaction, directly or indirectly, on behalf of any such person, group, entity or nation.
11. Lease in Full Force and Effect . Except as expressly provided herein, all of the terms and provisions of the Lease shall remain in full force and effect. Without limiting the generality of the foregoing, Tenant acknowledges that Landlord’s liability is limited as set forth in Section 34.K of the Lease and remakes its representations and warranties set forth in Section 34.M of the Lease.
[signatures on following page]
 
2

This Amendment is executed by the undersigned as of the date first above written.

LANDLORD:	
	
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA , a New Jersey corporation	
		
By:	 	/s/ Clarke Michalak	
Name: 	 	Clarke Michalak	
Title: 	 	Vice President	
	
TENANT :	
	
LKQ CORPORATION , a Delaware corporation	
		
By:	 	/s/ Frank P. Erlain	
Name:	 	Frank P. Erlain	
Title:	 	VP – Finance & Controller	
 
3

EXHIBIT 10.10

	  	Mailing Address:
P.O. Box 8963
Wilmington, DE 19899-8963
866-518-8969    Fax: 866-247-1245	  	Directed Trust Agreement 
Defined Contribution 	

	  		  		

PRINCIPAL TRUST COMPANY DIRECTED TRUST AGREEMENT
This Trust Agreement is made by and between the undersigned Employer and Delaware Charter Guarantee & Trust Company, a Delaware corporation conducting business under the trade name of Principal Trust Company. The Employer has adopted a Plan for the benefit of its employees. Any change in Plan name shall not affect this Trust Agreement.
The Employer and the Trustee mutually agree as follows:
SECTION .01 – DEFINITIONS.
For the purposes of this Trust Agreement, capitalized terms in this Trust Agreement shall have the meaning set out in this Section unless otherwise clearly required by context.
“81-100 trust” shall mean the group trust that meets the requirements of Revenue Ruling 81-100.
“Account” shall mean, with regard to each Participant, the portion of the Trust Fund that is attributable to that Participant.
“Annuity Contract” shall mean an individual or group annuity contract issued by an Insurer to the Trustee for the purpose of funding annuity benefits under the Plan.
“Beneficiary” shall mean the person or persons named by a Participant to receive any benefits under the Plan when the Participant dies.
“Code” means the Internal Revenue Code of 1986, as amended.
“Contributions” shall mean the amounts that are (i) described in the Plan Documents allowable as contributions to the Plan and (ii) forwarded to the Trustee to be held and invested in the Trust as set forth herein.
“Employer” shall mean the employer identified in Exhibit A.
“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended, or the corresponding provisions of any successor law.
“Insurer” shall mean an insurance company that issues a policy or contract with regard to the Plan and which policy or contract is held in the Trust in the event that any such policy or contract is issued.
“Investment Manager” shall mean an investment manager, as defined in Section 3(38) of ERISA, that has been retained to provide investment advice or management with regard to the Plan. The Employer shall give the Trustee notice of the identity of each Investment Manager and of any new or terminating Investment Managers.
 
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“Named Fiduciary” shall mean the person or other entity designated as such in the Plan Documents. The Employer shall give the Trustee notice of the identity of each Named Fiduciary and of any new or terminating Named Fiduciaries. The Trustee shall not be designated as a Named Fiduciary and any attempt to do so shall be void and of no effect.
“Participant” shall mean a participant in the Plan with respect to whom there is an Account, as defined in this Trust Agreement. For the purposes of the operation of this Trust only, the term Participant shall also include a person who has an interest in the Trust as the result of an assignment under a Qualified Domestic Relations Order (as defined ERISA Section206(d) and Code Section414(p)).
“Plan” shall mean the employee pension benefit plan (as defined in ERISA Section3 (2)(A)) identified in Exhibit A.
“Plan Administrator” shall mean the person or other entity designated as such in the Plan Documents. The Employer shall give the Trustee notice of the identity of the Plan Administrator and of any replacement of the Plan Administrator. The Trustee shall not be designated as Plan Administrator and any attempt to do so shall be void and of no effect.
“Plan Documents” shall mean the documents under which the Plan is established and maintained.
“Plan Year” shall mean the plan year defined in the Plan Documents. The Employer shall give the Trustee notice of such definition and any changes to it.
“Successor Trustee” shall mean a trustee appointed by the Employer under Section.03 of this Trust Agreement to succeed the Trustee.
“Trust” shall mean the directed trust established as set forth in this document.
“Trust Fund” shall mean the Trust Fund described in Section.02.
“Trustee” shall mean Delaware Charter Guarantee & Trust Company, a Delaware corporation conducting business under the trade name of Principal Trust Company.
SECTION .02 – THE TRUST AND TRUST FUND.
By signing this Trust Agreement, the Employer establishes the Trust to hold and distribute the Trust Fund in accordance with the provisions of the Plan Documents. Except to the extent that ERISA applies, the laws of the State of Delaware shall govern, control, and determine all questions arising with respect to a Trustee acting pursuant to the provisions of this Trust Agreement, including the validity of its provisions. This Trust Agreement shall be interpreted in a manner consistent with the intent to satisfy the relevant provisions of state and federal laws including the Code and ERISA, if applicable.
The Trust Fund consists of the assets held at any time, and from time to time, by the Trustee under this Trust Agreement (including assets held by a group trust that meets the requirements of Revenue Ruling 81-100 (an “81-100 trust”), which may be maintained or administered by an Investment Manager, or assets held by a custodian, transfer agent, broker/dealer, or other entity subject to a proper arrangement with the Trustee) and shall consist of Contributions received by the Trustee and all manner of investments, and the proceeds thereof, attributable to those Contributions. The Trust Fund shall include only those assets that the Trustee accepts and which are received by the Trustee. The Trust Fund shall be valued at current fair market value as of the last day of the Plan Year and, at the discretion of the Trustee, may be valued more frequently. The valuation shall take into consideration investment earnings credited, expenses charged, payments made, and changes in the values of the assets held in the Trust Fund. The Account of a Participant shall be credited with its share of the gains and losses of the Trust Fund. That part of a Participant’s Account invested in a funding arrangement or other investment vehicle which establishes an account or accounts for such Participant thereunder shall be credited with the gains
 
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or losses from such account or accounts. That part of a Participant’s Account which is invested in other funding arrangements or other investment vehicles shall be credited with a proportionate share of the gains or losses of such investments. The share shall be determined by multiplying the gain or loss of the investment by the ratio of (i) the part of the Participant’s Account invested in such funding arrangement or other investment vehicle to (ii) the total of the Trust Fund invested in such funding arrangement or other investment vehicle.
The corpus or income of the Trust Fund shall not be used for, or diverted to, purposes other than for the exclusive benefit of the Participants or their Beneficiaries.
SECTION .03 – THE TRUSTEE.
The Trustee accepts appointment as Trustee by executing this Trust Agreement.
The Named Fiduciary may remove the Trustee upon thirty (30) days prior notice. The Trustee may resign at any time upon thirty (30) days notice to the Named Fiduciary, or, with the consent of the Named Fiduciary, the Trustee may resign with less than thirty (30) days prior notice. Upon such removal or resignation of the Trustee, the Named Fiduciary or the Employer shall appoint a Successor Trustee who shall have the same powers and duties as those conferred upon the Trustee hereunder. The Successor Trustee must accept such appointment in writing for the appointment to become valid, at which point only will the Trustee’s appointment as such be considered to have terminated and the Successor Trustee shall become the Trustee under this Trust Agreement.
If the Successor Trustee fails to accept the appointment, or if the Named Fiduciary or Employer fails to appoint a Successor Trustee within thirty (30) days of the resignation or removal of the Trustee, then the Named Fiduciary or Employer shall appoint the President, or such other officer of the Employer who is eligible, Successor Trustee and such person shall be deemed to have filed his or her acceptance of appointment as the Successor Trustee.
When appointment has been accepted, or deemed accepted, by a Successor Trustee, the removed or resigning Trustee must assign, transfer, pay over, and deliver to the Successor Trustee all of the Trust Fund, less any unpaid fees or expenses, and such relevant records as the Trustee may possess. No Successor Trustee shall be obliged to examine the accounts, records, and acts of any previous Trustee, and such Successor Trustee in no way or manner shall be responsible for any action or omission to act on the part of any previous Trustee.
The Named Fiduciary or Employer shall notify the Insurer of any change of Trustee.
SECTION .04 – DUTIES OF THE TRUSTEE.
The Trustee shall accept Contributions forwarded to the Trustee to be held in the Trust and shall hold the Trust Fund and administer it according to the provisions of this agreement. The Trustee shall be a directed trustee with respect to Contributions and has no duty to demand or require that Contributions be made to the Trust, nor shall the Trustee be liable to determine the amount of any Contributions to the Trust or the adequacy of such Contributions to meet or discharge any liabilities of the Employer or the Plan. The Named Fiduciary retains the responsibility for monitoring and collecting Contributions, unless the Named Fiduciary has delegated this responsibility to an investment Manager.
The Plan Administrator administers the Plan. The Trustee is not responsible for any aspect of the Plan’s administration. A Named Fiduciary may appoint an Investment Manager to manage, including the power to acquire and dispose of, any assets of the Plan. The Trustee is not responsible for any aspect of an Investment Manager’s advice, control or management. The Trustee is not required to look into any action taken by the Named Fiduciary, the Employer, the Plan Administrator, the Investment Manager, or a Participant, and will be fully protected in taking, permitting, or omitting any action on the basis of their
 
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instructions or direction unless such direction is, in the Trustee’s opinion, contrary to the terms of the Plan, the Code or ERISA. Any instructions, notice, or direction by the Named Fiduciary, the Employer, the Plan Administrator, an Investment Manager, or a Participant, given in accordance with the provisions of the Plan Documents shall be given or made as described in this Trust Agreement; any attempted instruction, direction, or notice made in any other format shall be void and of no effect and the Trustee shall not act on such. The Employer will indemnify the Trustee for any claims and costs the Trustee may incur in acting according to the Trust provisions or upon instruction, direction, or notice from the Named Fiduciary, the Employer, the Plan Administrator, an Investment Manager, or a Participant.
In the event the Trustee becomes aware of material non-public information, the Trustee reserves the right to inquire about the Named Fiduciary’s knowledge and consideration of such information with respect to the directions the Trustee received. The Trustee reserves the right to contact the Employer directly if written confirmation to the Trustee’s inquiry is not received from the Named Fiduciary within a reasonable period of time.
Notwithstanding any other provision of this Trust Agreement, the Trustee shall discharge its duties hereunder solely in the interest of Participants and beneficiaries and with the care, skill and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Trustee shall perform its duties in accordance with this Trust Agreement. The Trustee shall not be responsible for any action or omission of the Named Fiduciary, Employer or Investment Manager with respect to the performance of the Trustee’s duties and obligations set forth in this Trust Agreement and ERISA.
SECTION .05 – DIRECTED POWERS OF THE TRUSTEE.
The Trustee shall have the following powers with respect to the Trust Fund as appropriate under this Trust Agreement and subject to direction or instruction by the Named Fiduciary, the Employer, the Plan Administrator, an Investment Manager, or a Participant, as appropriate under the Plan Documents. In no event shall the Trustee be required to review such directions or instructions, except as set forth in Section .04, and the Employer shall indemnify and protect the Trustee from any claims and costs resulting from following such directions. The Trustee shall have the power to:
 
a)	receive and hold Contributions forwarded to it under this Trust Agreement and to invest the Trust Fund in one or more of the following as directed by the Named Fiduciary, the Employer, the Plan Administrator, an Investment Manager, or a Participant:	
 
 	1)	Annuity Contracts with the Insurer which provide for either guaranteed benefits or the investment of Plan assets in one or more separate accounts maintained by the Insurer, or both;	
 
 	2)	Loans to Participants, provided such loans are duly authorized by the Plan Documents and that such authorization meets the requirements of both ERISA and the Code;	
 
 	3)	81-100 trust; provided, however, that as long as the Trustee holds any units in an 81-100 trust hereunder, the instruments establishing and or amending any such 81-100 trust shall be adopted and made part of this Trust as though fully set forth herein;	
 
 	4)	Custodial arrangements;	
 
 	5)	Cash or other short-term investments including money market funds;	
 
 	6)	Qualifying employer securities as defined in Code Section 409(l) and ERISA Section 407(d)(5)(a);	
 
 	7)	An insurance policy issued by an Insurer designated by the Employer;	
 
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 	8)	Exchange-traded debt and equity securities, mutual fund shares; and	
 
 	9)	Such assets, securities, or investment options as may be necessary to effectuate the purpose of this Trust.	
 
b)	sell, exchange, convey, transfer, or otherwise dispose of any property held by it, by private contract or at public auction;	
 
c)	vote on all matters as directed by the Named Fiduciary, Investment Manager or Participant pertaining to all securities and mutual fund shares held by the Trustee directly (other than qualifying employer securities). The Trustee shall vote any securities and mutual fund shares that may be held by it solely as directed by the Named Fiduciary, Investment Manager or Participant in accordance with this Trust Agreement. If the Trustee receives timely directions on how to vote securities or mutual fund shares with regard to fewer than all of the securities or mutual fund shares subject to the vote, the Trustee shall vote such undirected securities or mutual fund shares in the same proportion as those for which it has received timely direction. The Trustee shall be under no duty to investigate any matter relating to a vote and shall have no power or authority to vote other than as set forth in this Trust Agreement;	
 
d)	enter into an alternate arrangement (other than a self-directed brokerage account), including an 81-100 trust, an ancillary trust or a custodial arrangement to facilitate the investment of securities and mutual funds. If any securities and mutual fund shares are held in such alternate arrangement, to inform the trustee or custodian of such alternate arrangement of the voting directions the Trustee has received with regard to securities or mutual fund shares held in such alternate arrangement and to identify the securities or mutual fund shares with respect to which the Trustee has received partial or no direction or instruction. Those securities shall then be voted in accordance with the documents governing the 81-100 trust, ancillary trust or custodial arrangement. Nothing in this Trust Agreement shall be held as changing or affecting such other trusts or agreements. The Trustee shall have no power or authority to act otherwise than as set out in this paragraph with regard to votes on the securities and mutual fund shares described in this paragraph;	
 
e)	vote and tender qualifying employer securities held hereunder in the manner described in the Plan Documents, or if qualifying employer securities are held in an ancillary trust to inform the trustee of the ancillary trust of the voting directions the Trustee has received and to identify the qualifying employer securities with respect to which the Trustee has received partial or no direction or instruction;	
 
f)	vote and tender any securities and mutual fund shares held in a self-directed brokerage account in the manner described in the Plan and any applicable brokerage account agreements;	
 
g)	retain in cash or other short term investment vehicles/instruments such amount as the Trustee considers advisable, and to deposit cash in any depository selected by the Trustee, without liability for interest;	
 
h)	open such brokerage accounts with a broker/dealer on behalf of the Trust, as may be necessary to effect transactions in securities held in the Trust Fund; and	
 
i)	distribute from the Trust Fund benefit and expense payments provided such payments are duly authorized by the Plan Documents and that such authorization meets the requirements of both ERISA and the Code.	
 
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SECTION .06 – COMPLEMENTARY POWERS OF THE TRUSTEE.
In exercising its powers under Section .05 of this Trust Agreement and discharging its duties generally under this Trust Agreement, the Trustee shall have the following powers with respect to the Trust Fund:
 
a)	to employ, and pay reasonable compensation to, agents, brokers, broker/dealers, attorneys, accountants, custodians, ancillary trustees, outside investment financial consultants, or other persons, whose advice or services the Trustee may deem necessary in carrying out its duties and powers under this Trust Agreement;	
 
b)	to make, execute, acknowledge, and deliver any instruments that may be necessary to carry out the powers granted it, including custodial, 81-100 trust, or ancillary trust agreements;	
 
c)	to consult with legal counsel, including the Employer’s counsel, with respect to the meaning or construction of, or the Trustee’s obligations or duties under, the Plan Documents and Trust, or with respect to any action or proceeding or any question of law. The Trustee shall be fully protected with respect to any action it takes in good faith pursuant to the advice of such counsel;	
 
d)	to enforce any right, obligation, or claim and, in its absolute discretion, to protect in any way the interest of the Trust Fund and, if the Trustee considers such action for the best interest of the Trust Fund, to abstain from the enforcement of any right, obligation, or claim and to abandon any property which it has held;	
 
e)	to institute, maintain, or defend any litigation necessary in connection with the administration of the Trust, provided the Trustee shall be under no duty or obligation to do so unless it shall be indemnified to its satisfaction against all expenses and liabilities which it may sustain or be paid reasonable compensation for its own extraordinary services in connection therewith;	
 
f)	to hold assets in the Trustee’s name or in the name of a nominee and to cause assets to be held by such custodian, 81-100 or ancillary trustee, transfer agent, broker, broker/dealer, or other party as appropriate to carrying out the Trustee’s duties under this Trust Agreement;	
 
g)	to do all things necessary, in the Trustee’s judgment, for the proper performance of the Trustee’s duties under this Trust Agreement;	
 
h)	to assume, until advised to the contrary, that the Trust is qualified under Code Section 401(a);	
 
i)	to terminate the Plan’s participation in an 81-100 trust or custodial arrangement if such trust or arrangement limits participation to qualified plans and the Trustee learns of a determination by the Internal Revenue Service or a court of competent jurisdiction that the Plan is no longer qualified or that continued participation in the 81-100 trust or custodial arrangement would have adverse tax consequences for the Plan; and	
 
j)	to make appropriate custodial arrangements with a benefits paying agent for the payment of benefits under the Plan.	
 
k)	to require from the Employer, the Plan Administrator, or their authorized representatives written representations and warranties that the Plan maintains and follows established written procedures for identifying prohibited transactions and seeking applicable exemptive relief.	
 
l)	to require written representations and warranties from the Named Fiduciary, Investment Manager or their authorized representatives that no direction provided by the Named Fiduciary, Investment Manager or their authorized representatives will result in a non-exempt prohibited transaction under the Code or ERISA.	
 
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SECTION .07 – EXPENSES.
The Trustee shall be reimbursed by the Employer for all expenses incurred by the Trustee in exercising its powers and carrying out its duties under this Trust Agreement and for such reasonable compensation for the Trustee as may be agreed upon from time to time by the Employer and the Trustee. If, and to the extent, the Employer does not timely pay such expenses and compensation, they shall be paid from the Trust Fund, either as directed by the Named Fiduciary, the Employer, the Plan Administrator, or Investment Manager, as appropriate in accordance with the Plan Documents or pro rata with respect to each Participant’s Account and, within the Participant’s Account, pro rata with regard to the securities, mutual fund shares or other investments attributable to that Participant’s Account including investments in 81-100 trusts, ancillary trusts, or custodial arrangements. The Trustee may also pay other expenses of the Plan, as directed by the Named Fiduciary, the Employer, the Plan Administrator, or Investment Manager, as appropriate in accordance with the Plan, from the Trust Fund in the same manner as described above. The Trustee is hereby authorized to collect expenses and compensation as described above.
The Trustee may earn compensation in the form of short-term interest (“float”) on things like uncashed distribution checks (from the date issued until the date cashed). The Trustee may also earn “float” on Contributions, loan payments, and other amounts awaiting investment, and on transfers or distributions involving certain non-proprietary funds prior to processing. The “float” earns money market rates. “Float” is not directly credited to plans for which the Trustee provides services. Contributions and transfers are normally allocated and invested the same day or as soon as possible afterwards, however, there are certain situations where the allocation of these funds will take a longer period of time. Distribution checks are normally mailed the day they are issued. The timing of when checks are cashed is beyond the control of the Trustee.
The separate service agreement between the Employer and the Plan’s service provider may include a provision that requires the service provider to correct inadvertent errors that may occur in processing certain transactions. This provision may allow the service provider to retain certain amounts as compensation for its services and such amounts shall be considered an expense of the Plan.
SECTION .08 – ACCOUNTING.
The Trustee or its designee shall maintain true and accurate records and accounts reflecting all receipts and disbursements of the Trust Fund and containing a description of all Trust Fund assets held hereunder. These records will be open, at the Trustee’s regular place of business, to inspection and audit by the Named Fiduciary, the Employer, the Plan Administrator, or the Investment Manager at all reasonable times.
Writing (handwriting, typing, printing), photostating, photographing, microfilming, magnetic impulse, mechanical, electrical or electric recording, or other forms of data compilation shall be acceptable means of keeping records.
The Trustee or its designee shall file all reports, returns, and information required to be filed by Trustees under the Code and regulations and rulings issued under the Code.
The Trustee or its designee shall file with the Employer an accounting of its transactions as soon as practical after the first day of each Plan Year or any other date specified. Any such report or accounting is open to inspection by the Named Fiduciary or a Participant for a period of sixty (60) days following the date it is filed. At the end of the sixty-day period, the Trustee is released and discharged as to any matters set forth in the report or Account, except with respect to any act or omission as to which the Named Fiduciary, the Employer, the Plan Administrator or a Participant has filed a written objection within the sixty-day period.
 
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In preparing its reports, the Trustee shall be permitted to rely upon, attach, otherwise include, and deem accurate without the need for independent verification, reports furnished to the Named Fiduciary, the Employer, Plan Administrator, or Trustee by the Insurer, any Investment Manager, and any investment fund or custodian.
SECTION .09 – AMENDMENT.
The Employer and the Trustee jointly reserve the right to amend this Trust Agreement by written instrument executed by both parties at any time upon terms mutually acceptable, and effective as agreed by the Employer and the Trustee.
The Trustee may amend this Trust Agreement (including any Exhibits) at any time by written instrument, provided that such amendment is, in the Trustee’s opinion, required by applicable law or regulations. Copies of the amended Trust Agreement shall be sent to the Employer by the Trustee or its designee no less than sixty (60) days prior to the effective date of such change set out in the amended Trust Agreement (which shall be effective irrespective of when or whether such copy is received by the Employer).
No amendment described in this Section .09 shall permit any part of the corpus or income of the Trust Fund to be used for, or diverted to, purposes other than for the exclusive benefit of Participants, retired Participants or their Beneficiaries.
SECTION .10 – TERMINATION.
The Employer reserves the right to terminate this Trust Agreement by a written instrument delivered to the Trustee. This Trust Agreement shall automatically terminate upon the dissolution or liquidation of the Employer unless a successor corporation or business organization agrees in writing to assume the obligations of the Plan and this Trust.
Any Annuity Contract held in the Trust Fund at the time this Trust is terminated shall be transferred to the Employer and the remainder of the assets of the Trust Fund shall be transferred to the person or institution authorized in writing by the Employer to receive such assets.
If the Employer does not direct the transfer of the remainder of the assets of the Trust Fund to a person or institution authorized in writing by the Employer to receive such assets or the Trustee is not informed of the identity of any such person, the Trustee shall seek appointment of an appropriate recipient. The Trustee shall be paid all expenses incurred in doing so.
In the event of the termination of the Trust Agreement on account of termination of the Plan, the assets of the Trust Fund shall be applied as directed by Named Fiduciary, the Employer, or the Plan Administrator, to provide the benefits specified in the Plan upon termination of the Plan.
SECTION .11 – INSURER.
With regard to any portion of the assets of the Trust Fund consisting of Annuity Contracts issued by an Insurer, such Insurer shall in no event be deemed to be a party to this Trust or to be responsible for its validity. The obligations and responsibilities of the Insurer shall be measured and determined solely by the terms of the Annuity Contract and any insurance policy and it shall not be required to do any act not provided in, or any act contrary to, the provisions of such Annuity Contract and insurance policy.
The Insurer shall not be required to look into the terms of this Trust Agreement or question any action of the Trustee, nor shall it be responsible to see that any action of the Trustee is authorized. The Insurer shall act only upon the direction of the Trustee and shall be fully discharged from any and all liability for
 
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any amount paid to the Trustee or paid in accordance with the direction of the Trustee or for any change made, or action taken, upon such direction and shall not be obligated to see that any money paid by it to the Trustee or to any person shall be properly distributed or applied. Any instrument executed by the Trustee may be treated as conclusive. The Insurer shall be without liability in taking, permitting, or omitting any action on the faith of any such instrument and shall incur no liability or responsibility for doing so.
Notices, proposed contract amendments, rate or fee changes, or other communications regarding any Annuity Contracts that may be held hereunder will be sent directly to either the Employer or the Trustee. The Trustee shall not take any action with respect to any such notice, proposed amendment, change, or other communication unless the Trustee receives appropriate written direction from the Employer. Any rights of a contractholder under any such Annuity Contract, including rights to discontinue, amend, or otherwise modify the Annuity Contract shall be exercised only upon the specific written direction of the Employer.
SECTION .12 – LIMITATION ON RIGHTS AND REMEDIES.
In any action or proceeding involving the Trust Fund, or the administration of the Trust Fund, only the Trustee and the Employer shall be the necessary parties. Unless otherwise ordered by the court entertaining jurisdiction thereover, no other person having or claiming to have an interest in the Trust Fund shall be entitled to any notice or service of process. Any final judgment entered in such an action or proceeding shall be conclusive upon all persons claiming under this Trust Agreement.
SECTION .13 – LIMITATION OF TRUSTEE’S LIABILITY.
 
a)	Any direction, instruction, or notice to the Trustee by the Named Fiduciary, the Employer, the Plan Administrator, the Investment Manager, the Insurer, or other person pursuant to any of the provisions of this Trust shall be in writing and delivered by regular mail, and shall be effective only upon actual receipt. Any direction, instruction, or notice from the Trustee to the Named Fiduciary, the Employer, the Plan Administrator, the Investment Manager, a Participant, the Insurer, or other person pursuant to any of the provisions of this Trust shall be considered effective when the Trustee mails it to the last address of the intended recipient which is contained in the Trustee’s records. The Employer and the Trustee may agree in writing that any such direction, instruction, or notice may be given by alternative methods, including facsimile transmission, telephone, or electronic transmission to any e-mail address, fax or telephone number and shall, with regard to such alternate means of giving any such direction, instruction, or notice, provide for the use of identifying numbers or procedures that must be followed with regard to the giving of any such direction, instruction, or notice. The Employer shall inform the Named Fiduciary, the Plan Administrator, any Investment Manager and Participants of such agreed upon alternative methods. The Trustee shall not be under any duty or obligation to act on any notice, instruction, or direction received in a form other than those agreed upon between the Named Fiduciary, the Employer, the Plan Administrator, and the Trustee. The Trustee may absolutely rely upon any and all such directions, instructions, or notices reasonably believed by it to be genuine and shall be fully protected in acting in accordance therewith. The Employer agrees to indemnify and hold the Trustee harmless against any loss, cost, claim, damage, expense, and liability (including attorney’s fees) and other costs it may incur in acting upon such notice, instructions, or directions. Except for the Trustee’s own negligence, the Trustee shall incur no liability for any act or failure to act pursuant to this Trust Agreement, unless a higher standard of care is imposed by ERISA.	
 
b)	The Trustee is not liable for the acts or omissions of the Named Fiduciary, the Employer, the Plan Administrator, the Investment Manager, or the Insurer, nor is the Trustee under any obligation to invest or otherwise manage any asset of the Plan which is subject to the management of a properly appointed Investment Manager. A Named Fiduciary and any properly appointed Investment Manager may execute a letter of agreement as a part of this Trust delineating the duties, responsibilities, fee structure, and liabilities of the Investment Manager with respect to any part of the Trust Fund under the control of the Investment Manager.	
 
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c)	The Trustee may assume that the Named Fiduciary, the Employer, the Plan Administrator, the Investment Manager, and the Insurer are appropriately discharging their duties under the Plan Documents and this Trust Agreement unless and until it is notified to the contrary in writing by any person known to the Trustee to be a Participant in the Plan, the Employer, or a governmental agency with jurisdiction. In the event the Trustee receives said written notice, then the Trustee shall take any actions it deems appropriate, including, if the Trustee so desires, applying to a court of competent jurisdiction and/or Federal regulatory authorities for guidance with respect to disposition of the Trust Fund.	
 
d)	The Trustee shall have no responsibility for the management and control of the Trust Fund beyond implementation of instructions, notice, or directions received by the Trustee in accordance with this Trust Agreement, it being contemplated that all Plan assets will be under the control or direction of the Insurer or a properly appointed Investment Manager, or subject to Named Fiduciary, Employer, Plan Administrator, or Participant direction. The Trustee shall not be responsible for reviewing reports provided by the Insurer or any Investment Manager. The Trustee will be under no duty of inquiry or review with regard to any direction, instruction, or notice that it may receive in accordance with this Trust Agreement except as set forth in Section .04.	
 
e)	The duties and responsibilities of the Trustee shall be limited to those set forth in this Trust Agreement and nothing contained in this Trust Agreement shall be deemed, either expressly or by implication, to impose any additional duties, powers, or responsibilities on the Trustee.	
SECTION .14 – SECTION 404(c) COMPLIANCE.
The Trustee shall have no duty or responsibility to review any aspect of the Plan or its administration relating to compliance with ERISA Section 404(c).
SECTION .15 – MISCELLANEOUS.
 
a)	To the extent permitted by law, no person shall be obliged to see to the application of any money paid or property delivered to the Trustee, nor shall any such person be required to take cognizance of the provisions of this Trust Agreement. In general, each person dealing with the Trustee may act upon any advice, request, or representation in writing by the Trustee, or the Trustee’s duly authorized agent, and shall not be liable to any person in so doing.	
 
b)	The Trustee may require delivery to it a copy of any certificate, notice, or other instrument or information believed by it to be necessary to perform its duties hereunder and may rely and act upon the basis of any such certificate, notice, instrument, or other information furnished to the Trustee which it believes to be reliable and to have been signed, made, or presented by the proper party or parties.	
 
c)	To the extent permitted by law, the Trustee shall not be responsible for any act or omission of the Named Fiduciary, the Employer, the Plan Administrator, or the Investment Manager. The Trustee shall be under no duty to inquire into any rule, regulation, instruction, direction, or order purporting to have been issued by the Named Fiduciary, the Employer, the Plan Administrator, or the Investment Manager.	
 
d)	Notwithstanding anything else in this Trust Agreement, the Trustee has the right, but not the obligation, to seek guidance from a court of competent jurisdiction or Federal regulatory authorities with respect to the handling and disposition of the Trust Fund.	
 
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e)	No interest under this Trust may be alienated, anticipated, encumbered or assigned, voluntarily or involuntarily and any such attempted assignment, alienation, anticipation, or encumbrance shall be void and of no effect. Nothing in this Trust Agreement, however, shall prevent an assignment or alienation that the Plan Administrator advises the Trustee is necessary to fulfill the requirements of a Qualified Domestic Relations Order, as defined in ERISA Section 206(d) and Code Section 414(p).	
 
f)	Except as may be specifically permitted by the Plan Documents, under no circumstances shall any asset held in the Trust Fund or any Contributions made to the Trust ever revert to or be used or enjoyed by the Employer or used for any other purpose than the funding or provision of benefits to eligible Participants or their Beneficiaries or the satisfaction of other lawful obligations of the Plan prior to the satisfaction of all liabilities under the Plan. The Trustee shall be under no obligation to return any asset of the Trust Fund to the Employer, unless the Trustee has received written certification from the Employer that all Plan liabilities have been satisfied and that the Plan has been terminated or written certification that the amount requested by the Employer is the result of a bona fide mistake of fact described in ERISA 403(c)(2)(A)(i) and is in accord with the provisions of the Plan Documents. The Trustee may rely completely on such written certification.	
 
g)	This Trust Agreement shall be interpreted in a manner consistent with the requirements of Code Section 401(a), so that the Trust remains tax exempt under Code Section 501. If the terms of this Trust Agreement conflict with relevant terms of ERISA, the Code, or Delaware law, the requirements of those laws shall be deemed to be part of this Trust Agreement and shall supersede any other provision in this Trust Agreement that is to the contrary. This Trust Agreement shall be construed as though jointly drafted by the Trustee and the Employer and according to the fair intent of the language as a whole and not for or against anyone. The term “including” shall be construed providing examples only and as being without limitation.	
 
h)	Each individual signing this Trust Agreement represents and warrants that she or he has, individually or in concert with the other persons signing this Trust Agreement on behalf of the same entity, the authority to sign this Trust Agreement and thereby bind that entity to the terms and conditions of this Trust Agreement.	
SECTION .16 – EMPLOYER’S REPRESENTATIONS AND WARRANTIES.
The Employer represents and warrants that:
 
a)	The Named Fiduciary or Employer shall timely provide the Trustee with a copy of any SEC 8-K filing and shall notify the Trustee of any bankruptcy filings, formal civil or criminal charges filed against the Employer or directors by federal or state regulators.	
 
b)	There are no existing 8-K filings, bankruptcy filings, or legal actions known to the Named Fiduciary, Employer or Investment Manager other than those disclosed to the Trustee and that no direction provided by the Named Fiduciary, Employer or Investment Manager will result in a non-exempt prohibited transaction under the Code or ERISA.	
 
c)	The Named Fiduciary and the Plan Administrator will maintain and follow established written procedures for identifying prohibited transactions and seeking applicable exemptive relief.	
 
d)	There are no plan documents or instruments that establish limits on the investments in which the plan may invest that have not been provided to the Trustee and that it or the Named Fiduciary will provide copies to the Trustee within 15 days of any changes to the Plan’s documents that establish limits on plan investments.	
 
e)	It will not object if the Trustee discloses material non-public information to the Named Fiduciary or Employer.	
 
Page 11 of 14

SECTION .17 – EXECUTION.
This Trust Agreement may be executed in counterparts, each of which shall be deemed an original.
SECTION .18 – WAIVER.
It is understood and agreed that no failure or delay to exercise, nor any single or partial exercise of, any right, power, or privilege given or arising under this Trust Agreement shall operate as a waiver of future rights to exercise any such right, power, or privilege.
SECTION .19 – CHANGE IN PLAN TERMS.
Changes to the Plan Documents or the operation of the Plan shall not serve to increase or decrease the responsibility, duties, or obligations of the Trustee under this Trust Agreement. The Trustee and the Employer may negotiate and make any changes to this Trust Agreement that appropriately reflect such changes. Absent such negotiated changes, the Trustee shall be obligated to no more than continued performance under this Trust Agreement as if the changes to the Plan Documents had not occurred.
 
Page 12 of 14

IN WITNESS WHEREOF, the undersigned have executed this Trust Agreement to be effective as of the date both the Employer and the Trustee have signed this Trust Agreement.

FOR THE EMPLOYER	  		
			
Name of Employer:	  	LKQ Corporation	  		
			
By:	  	/S/ Walter P. Hanley	  		
	  	        (Signature)	  		
			
Business Title:	  	Senior Vice President	  		
			
Print Name:	  	Walter P. Hanley	  		
			
Date:	  	November 19, 2008	  		
The undersigned hereby accepts appointment as Trustee hereunder and agrees to be bound by the terms of this Trust Agreement.
ACCEPTANCE OF THE TRUSTEE
Delaware Charter Guarantee & Trust Company, a Delaware corporation conducting business under the trade name of Principal Trust Company.

By:	  	/s/ Carol L. Burns	  		
	  	    (Signature)	  		
			
Business Title:	  	S.V.P.	  		
			
Date:	  	12/22/08	  		
 
Page 13 of 14

Exhibit A

Name of Employer:	  	LKQ Corporation	
		
Name of Plan:	  	LKQ Corporation Employee’s Retirement Plan	
 
Page 14 of 14

EXHIBIT 10.11
LKQ CORPORATION
401(k) PLUS PLAN II
(As Amended and Restated Effective as of January 1, 2008)

LKQ CORPORATION
401(k) PLUS PLAN II
(As Amended and Restated Effective as of January 1, 2008)
Table of Contents

 	  	 	  	Page	
			
1.	  	INTRODUCTION	  	1	
				
	  	  1.1.	  	Amendment and Restatement of the Plan.	  	1	
				
	  	  1.2.	  	Purposes of Plan.	  	1	
				
	  	  1.3.	  	“Top Hat” Pension Benefit Plan.	  	1	
				
	  	  1.4.	  	Plan Unfunded.	  	1	
				
	  	  1.5.	  	Effective Date.	  	1	
				
	  	  1.6.	  	Administration.	  	1	
			
2.	  	DEFINITIONS AND CONSTRUCTION	  	2	
				
	  	  2.1.	  	Definitions.	  	2	
				
	  	  2.2.	  	Number and Gender.	  	7	
				
	  	  2.3.	  	Headings.	  	7	
			
3.	  	PARTICIPATION AND ELIGIBILITY	  	7	
				
	  	  3.1.	  	Participation.	  	7	
				
	  	  3.2.	  	Commencement of Participation.	  	8	
				
	  	  3.3.	  	Cessation of Active Participation	  	8	
			
4.	  	DEFERRALS, MATCHING AND COMPANY CONTRIBUTIONS	  	8	
				
	  	  4.1.	  	Deferrals by Participants.	  	8	
				
	  	  4.2.	  	Effective Date of Participation Agreement.	  	9	
				
	  	  4.3.	  	Modification or Revocation of Election by Participant.	  	11	
				
	  	  4.4.	  	Matching Contributions.	  	11	
 
i

							
				
	  	  4.5.	  	Company Profit Sharing Contribution.	  	11	
				
	  	  4.6.	  	Other Company Contributions.	  	11	
			
5.	  	VESTING, DEFERRAL PERIODS AND INVESTMENT ELECTIONS	  	11	
				
	  	  5.1.	  	Vesting.	  	11	
				
	  	  5.2.	  	Election of In-Service Distribution.	  	12	
				
	  	  5.3.	  	Investment Elections.	  	13	
			
6.	  	ACCOUNTS	  	14	
				
	  	  6.1.	  	Establishment of Bookkeeping Accounts.	  	14	
				
	  	  6.2.	  	Subaccounts.	  	14	
				
	  	  6.3.	  	Hypothetical Nature of Accounts.	  	14	
			
7.	  	PAYMENT OF ACCOUNT	  	14	
				
	  	  7.1.	  	Distribution of Contribution to 401(k) Plan.	  	14	
				
	  	  7.2.	  	Length of Deferral Period (i.e., Timing of Distributions).	  	15	
				
	  	  7.3.	  	Form of Payment.	  	16	
				
	  	  7.4.	  	No Acceleration Of Benefits.	  	16	
				
	  	  7.5.	  	Small Account.	  	17	
				
	  	  7.6.	  	Designation of Beneficiaries.	  	17	
				
	  	  7.7.	  	Unclaimed Benefits.	  	18	
				
	  	  7.8.	  	Unforeseeable Emergency Withdrawals.	  	18	
				
	  	  7.9.	  	Withholding.	  	18	
			
8.	  	ADMINISTRATION	  	19	
				
	  	  8.1.	  	Committee.	  	19	
				
	  	  8.2.	  	General Powers of Administration.	  	19	
				
	  	  8.3.	  	Indemnification of Committee.	  	19	
 
ii

							
9.	  	DETERMINATION OF BENEFITS, CLAIMS PROCEDURE AND ADMINISTRATION	  	19	
				
	  	  9.1.	  	Claims.	  	19	
				
	  	  9.2.	  	Claim Decision.	  	20	
				
	  	  9.3.	  	Request for Review.	  	20	
				
	  	  9.4.	  	Review of Decision.	  	21	
				
	  	  9.5.	  	Discretionary Authority.	  	22	
			
10.	  	MISCELLANEOUS	  	22	
				
	  	10.1.	  	Plan Not a Contract of Employment.	  	22	
				
	  	10.2.	  	Non-Assignability of Benefits.	  	22	
				
	  	10.3.	  	Amendment and Termination.	  	22	
				
	  	10.4.	  	Unsecured General Creditor Status Of Employee.	  	22	
				
	  	10.5.	  	Severability.	  	23	
				
	  	10.6.	  	Governing Laws.	  	23	
				
	  	10.7.	  	Binding Effect.	  	23	
				
	  	10.8.	  	Entire Agreement.	  	23	
				
	  	10.9.	  	No Guarantee of Tax Consequences.	  	23	
				
	  	10.10.	  	Sole Obligor.	  	24	
 
iii

LKQ CORPORATION
401(k) PLUS PLAN II
(As Amended and Restated Effective as of January 1, 2008)
 
1.	INTRODUCTION	
 
 	1.1.	Amendment and Restatement of the Plan.	
LKQ Corporation (the “Company”) hereby amends and restates the LKQ Corporation 401(k) Plus Plan (the “Plan”) generally effective as of January 1, 2008. The Plan is hereby being restated as of January 1, 2008, unless otherwise indicated herein, in order to incorporate all previous amendments, amend the Plan to comply with the final regulations issued pursuant to Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and to make any other necessary changes.
 
 	1.2.	Purposes of Plan.	
The purposes of the Plan are to provide deferred compensation for a select group of management or highly compensated Employees of the Company and to permit them to maximize their elective contributions to the LQK Corporation Employees’ Retirement Plan (the “401(k) Plan”) notwithstanding certain Code limitations.
 
 	1.3.	“Top Hat” Pension Benefit Plan.	
The Plan is an “employee pension benefit plan” within the meaning of Section 3(2) of the Employees Retirement Income Security Act of 1974, as amended (“ERISA”). The Plan is maintained, however, only for a select group of management or highly compensated employees and, therefore, is exempt from Parts 2, 3 and 4 of Title 1 of ERISA. The Plan is not intended to qualify under Code Section 401(a).
 
 	1.4.	Plan Unfunded.	
The Plan is unfunded. All benefits will be paid from the general assets of the Company, which will continue to be subject to the claims of the Company’s creditors. No amounts will be set aside for the benefit of Plan Participants or their Beneficiaries.
 
 	1.5.	Effective Date.	
The amended and restated Plan is effective as of January 1, 2008. The rights and benefits of and/or with respect to a Participant whose employment terminated prior to January 1, 2008 shall be determined under the provisions of the Plan in effect when his/her employment terminated.
 
 	1.6.	Administration.	
The Plan shall be administered by the Committee.
 
1

2.	DEFINITIONS AND CONSTRUCTION	
 
 	2.1.	Definitions.	
For purposes of the Plan, the following words and phrases shall have the respective meanings set forth below, unless the context clearly requires a different meaning:
 
 	2.1.1.	401(k) Plan.	
“401(k) Plan” means the LKQ Corporation Employees’ Retirement Plan, as amended from time to time.
 
 	2.1.2.	Account.	
“Account” means the bookkeeping account maintained by the Committee on behalf of each Participant pursuant to Section 6.1.
 
 	2.1.3.	Affiliate.	
“Affiliate” means any entity that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, LKQ Corporation, pursuant to Code Section 1563.
 
 	2.1.4.	Base Pay. 	
“Base Pay” means:
 
 	2.1.4.1.	the Employee’s gross base rate of salary with respect to services rendered or labor performed reflected in the personnel records of the Company for a particular Plan Year before deduction for income and employment taxes, but reduced by all legally required deductions against such income (including, but not limited to, wage assignments, wage garnishments, child support payments, levies, and remittance of all applicable taxes to governmental authorities); and	
 
 	2.1.4.2.	Commissions, if any.	
 
 	2.1.5.	Base Pay Deferral. 	
“Base Pay Deferral” means the amount of a Participant’s Base Pay which the Participant elects to have withheld on a pre-tax basis and credited to his/her Account pursuant to Section 4.1.
 
 	2.1.6.	Beneficiary.	
“Beneficiary” means the person or persons designated by the Participant in accordance with Paragraph 7.6.1 or, in the absence of an effective designation, the person or entity described in Paragraph 7.6.4.
 
2

 	2.1.7.	Board.	
“Board” means the board of directors of LKQ Corporation.
 
 	2.1.8.	Bonus Compensation.	
“Bonus Compensation” means the amount awarded to a Participant for a Plan Year under any bonus or long-term incentive arrangement maintained by the Company from time to time.
 
 	2.1.9.	Bonus Deferral.	
“Bonus Deferral” means the amount of a Participant’s Bonus Compensation which the Participant elects to have withheld on a pre-tax basis and credited to his/her account pursuant to Section 4.1.
 
 	2.1.10.	Code.	
“Code” means the Internal Revenue Code of 1986, as amended.
 
 	2.1.11.	Committee.	
“Committee” means the administrative committee appointed by the Board to administer the Plan in accordance with Section 7.2.
 
 	2.1.12.	Commissions.	
“Commissions” means remuneration paid by the Company to a Participant based on sales of the Company’s products and/or services made by the Participant or individuals under his/her supervision.
 
 	2.1.13.	Company.	
“Company” means LKQ Corporation, and any successor thereto, and any Affiliate.
 
 	2.1.14.	Company Profit Sharing Contribution.	
“Company Profit Sharing Contribution” means the discretionary contribution, if any, made by the Company for a Participant for a Plan Year in accordance with Section 4.5.
 
 	2.1.15.	Deferral.	
“Deferral” means a Base Pay Deferral and/or Bonus Deferral.
 
3

 	2.1.16.	Deferral Period.	
“Deferral Period” means the period of time for which a Participant elects to defer receipt of the Deferrals credited to such Participant’s Account as specified in Sections 5.2 or 7.1, as the case may be. Deferral Periods shall be measured on the basis of Plan Years, beginning with the Plan Year that commences immediately following the Plan Year for which the applicable Deferrals are credited to the Participant’s Account.
 
 	2.1.17.	Disability.	
“Disability” means a disability which qualifies for disability under the Company’s long-term disability plan; provided, however, if disability cannot, for purposes of Code Section 409A, be defined by reference to the Company’s long-term disability plan (or if no such plan exists), then disability means a condition whereby a Participant:
 
 	2.1.17.1.	is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or	
 
 	2.1.17.2.	is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Participant’s employer.	
 
 	2.1.18.	Director.	
“Director” means a member of the Board of the Company.
 
 	2.1.19.	Effective Date.	
“Effective Date” means August 1, 1999.
 
 	2.1.20.	Election to Extend Deferral Form	
“Election to Extend Deferral Form” means the form designated by the Committee for use by Employees and the Company to further extend the Deferral Period related to payment of their Deferrals under the Plan. This form may be changed at any time by the Committee as it deems necessary or advisable.
 
 	2.1.21.	Election to Change Form of Distribution	
“Election to Change Form of Distribution” means the form designated by the Committee for use by Employees and the Company to change the form in which
 
4

payment of their Deferrals under the Plan will be paid to them ( i.e. , lump sum or installments). This form may be changed at any time by the Committee as it deems necessary or advisable.
 
 	2.1.22.	Employee.	
“Employee” means any common-law employee of the Company.
 
 	2.1.23.	ERISA.	
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
 
 	2.1.24.	Matching Contribution.	
“Matching Contribution” means the discretionary matching contribution, if any, made by the Company for a Participant for a Plan Year which is based on the Participant’s Deferrals into the Plan for such Plan Year in accordance with Section 4.4.
 
 	2.1.25.	Other Company Contribution.	
“Other Company Contribution” means the discretionary contribution, if any, made by the Company for a Participant for a Plan Year in accordance with Section 4.6 and which is based on such criteria as the Company determines and deems appropriate.
 
 	2.1.26.	Participant.	
“Participant” means each Employee who has been selected for participation in the Plan and who has become a Participant pursuant to Section 3.
 
 	2.1.27.	Participation Agreement.	
“Participation Agreement” means the written agreement pursuant to which the Participant:
 
 	2.1.27.1.	elects the amount of his/her Base Pay and Bonus Compensation, if any, to be deferred pursuant to the Plan;	
 
 	2.1.27.2.	elects the Deferral Period;	
 
 	2.1.27.3.	elects the initial timing-of-distribution elections and initial form-of-distributions elections as relates to the his/her Account;	
 
 	2.1.27.4.	elects the deemed investment of amounts credited to his/her Account; and	
 
5

 	2.1.27.5.	elects any such other matters as the Committee shall determine from time to time.	
 
 	2.1.28.	Performance Based Compensation.	
“Performance Based Compensation” means the portion of the Participant’s Bonus Compensation determined by the Committee to satisfy the requirements set forth in Treasury Regulation Section 1.409A-1(e) (or any successor guidance subsequently issued including revised Treasury Regulations or other administrative guidance issued pursuant thereto), and such Performance Based Compensation may be determined on a fiscal or calendar year basis.
 
 	2.1.29.	Permissible Investment.	
“Permissible Investment” means the investments specified by the Committee as available for hypothetical investment of Accounts. The Permissible Investments under the Plan are listed in the Participation Agreement, and the provisions of the Participation Agreement listing the Permissible Investments are hereby incorporated herein.
 
 	2.1.30.	Plan.	
“Plan” means the LKQ Corporation 401(k) Plus Plan II, as amended and restated effective January 1, 2008, and as further amended from time to time.
 
 	2.1.31.	Plan Year.	
“Plan Year” means the twelve-consecutive month period commencing January 1 of each year ending on December 31.
 
 	2.1.32.	Retirement Date.	
“Retirement Date” means the date a Participant voluntarily terminates his/her employment with the Company on the earlier of:
 
 	2.1.32.1 .	on or after he/she has attained at least sixty-five (65) years of age; or	
 
 	2.1.32.2.	on or after he/she has attained at least fifty-five (55) years of age and completed at least ten (10) Years of Service.	
 
 	2.1.33.	Specified Employee.	
“Specified Employee” shall mean a Participant who is a key employee (as defined in Code Section 416(i) without regarding to Code Section 416(i)(5)) of the Company. For purposes of this definition, a Participant is a key employee if the Participant meets the requirements of Code Section 416(i)(1)(A)(i), (ii) or (iii) (applied in accordance with the regulations thereunder and disregarding Code Section 416(i)(5)) at any time during the twelve-month period ending on any
 
6

December 31. If a Participant is a key employee as of any December 31, that Participant is treated as a Specified Employee for the twelve-month period beginning on the April 1 following the relevant December 31.
 
 	2.1.34.	Unforeseeable Emergency.	
“Unforeseeable Emergency” is as defined in Treasury Regulation Section 1.409A-3(i)(3)(i) (or any successor guidance subsequently issued including revised Treasury Regulations or other administrative guidance issued pursuant thereto).
 
 	2.1.35.	Valuation Date.	
“Valuation Date” means the last business day of each calendar month and each special valuation date designated by the Committee.
 
 	2.1.36.	Year of Service.	
“Year of Service” has the same meaning as in the 401(k) Plan for purposes of vesting.
 
 	2.2.	Number and Gender.	
Wherever appropriate, words used in the singular shall be considered to include the plural and words used in the plural shall be considered to include the singular. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender.
 
 	2.3.	Headings.	
The headings are included solely for convenience, and if there is any conflict between any heading and the text of the Plan, the Plan text shall control.
 
3.	PARTICIPATION AND ELIGIBILITY	
 
 	3.1.	Participation.	
Participants in the Plan are those Employees who are:
 
 	3.1.1.	subject to the income tax laws of the United States;	
 
 	3.1.2.	members of a select group of highly compensated or management Employees; and	
 
 	3.1.3.	selected by the Committee, in its sole discretion, as Participants.	
The Committee shall notify each Participant of his/her selection as a Participant in writing. Notwithstanding any eligibility designation under this Section 3.1, an Employee shall not be eligible for the first time unless and until notification is provided to them of such designation. Subject to the provisions of Section 3.3, a Participant shall remain eligible to continue participation in the Plan for each Plan Year following his/her initial year of participation in the Plan.
 
7

 	3.2.	Commencement of Participation.	
Subject to Code Section 409A nonqualified deferred compensation plan aggregation rules, an Employee who becomes newly eligible to participate in the Plan under Section 3.1 must submit the Participation Agreement within thirty (30) days of the date he/she first becomes eligible due to notification pursuant to Section 3.1 immediately above. However, such Deferral elections shall be prospective and shall apply only to Base Pay and/or Bonus Compensation that would otherwise be earned and then paid to the Employee after the Participation Agreement is filed. Notwithstanding the foregoing, no Deferral elections shall be permitted under the Plan until such time as determined by the Committee. Additionally, at the time a Participant files his/her first Participation Agreement, the Participant must also make the timing-of-distribution election (specifically relating to a specified, fixed date for distribution) described in Sections 5.2 or 7.1, as the case may be, and the form-of-distribution election also described in Section 7.2 related to his/her total amounts accumulated under the Plan. In the event that a Participant does not make a timing-of-distribution election (specifically relating to a specified, fixed date for distribution) and/or a form-of-distribution election with respect to his/her initial Deferral election under the Plan, such Participant shall be deemed to have initially elected to receive his/her deferred compensation in the form of a lump-sum on his/her date of termination of service (unless earlier acceleration due to death or Disability).
 
 	3.3.	Cessation of Active Participation	
In the event a Participant no longer meets the requirements for eligibility to participate in the Plan, such Participant shall become an inactive Participant as of the January 1 of the Plan Year immediately following the Plan Year that includes the ineligibility event trigger. Notwithstanding this, such Participant shall retain all of the rights described under the Plan, except the right to make any further deferrals hereunder as of the immediately following January 1; provided, however, that such a Participant shall continue to make deferrals for the remainder of the Plan Year in which he or she becomes ineligible to participate. The Committee shall communicate such ineligibility to such Participant in writing prior to the effective date of such action. Such cessation shall have no effect upon amounts then credited to his/her Account which shall remain subject to all of the applicable provisions of the Plan.
 
4.	DEFERRALS, MATCHING AND COMPANY CONTRIBUTIONS	
 
 	4.1.	Deferrals by Participants.	
Before the first day of each Plan Year (or as otherwise permitted by applicable law), a Participant may file with the Committee a Participation Agreement pursuant to which such Participant elects to make Deferrals. Participants may defer, in whole percentages, amounts which cannot exceed the following:
 
 	4.1.1.	up to fifty percent (50%) of Base Pay;	
 
8

 	4.1.2.	up to one hundred percent (100%) of Bonus Compensation.	
The minimum Deferral for a Plan Year is Two Thousand Dollars ($2000.00); provided, however, the minimum Deferral shall be prorated for any Plan Year in which an individual is not a Participant for twelve (12) months based on full months of participation. The maximum Deferrals permitted under the Plan for a Plan Year is Fifty Thousand Dollars ($50,000.00) or such other adjusted amount determined by the Committee from time to time before the commencement of any Plan Year; provided, however, such maximum shall not apply to Bonus Deferrals which shall not be subject to any maximum limitation. Any Participant Deferral election shall be subject to rules prescribed by the Committee. Deferrals will be credited to the Account of each Participant at the time they would have been paid to the Participant in cash but for the election to defer.
 
 	4.2.	Effective Date of Participation Agreement.	
 
 	4.2.1.	Annual Submission of Election to Defer Form.	
Before the beginning of each Plan Year, each Employee may elect to reduce the amount of:
 
 	4.2.1.1.	his/her Base Pay that would otherwise be earned and paid to the Employee in the following Plan Year; and/or	
 
 	4.2.1.2.	his/her Bonus Compensation that would otherwise be paid to the Employee in the second following Plan Year (where the immediately following Plan Year is the performance period upon which such Bonus is based).	
This Deferral election must be made on the Participation Agreement (or any successor form thereto for this purpose) provided by the Committee. A Participant’s Participation Agreement shall become effective on the first day of the Plan Year to which it relates. The Deferral election may be amended at any time but any election as in effect on the last business day before the first day of the Plan Year with respect to which the Deferral election is made shall govern. An Employee must file a new Participation Agreement for each Plan Year as to which he/she wishes to defer Base Pay and/or Bonus Compensation. Notwithstanding the foregoing, no such Deferral elections shall be permitted under the Plan until such time as determined by the Company. Notwithstanding anything to the contrary, a Participation Agreement with respect to any Bonus Compensation which is determined by the Committee to be Performance Based Compensation, shall be made as provided by the Committee, but no later than six (6) months prior to the end of such Bonus Compensation’s performance period.
 
 	4.2.2.	Failure to Submit Annual Election to Defer Form.	
If an Employee fails to submit the appropriate annual Participation Agreement as required under this Section 4.2, he/she will be deemed to have elected not to participate in the Plan for the Plan Year to which such Participation Agreement otherwise would apply.
 
9

 	4.2.3.	Cancellation of Deferral Elections .	
 
 	4.2.3.1.	Non Revocation of Deferral .	
   After the beginning of a Plan Year to which Base Pay and/or Bonus Compensation are deferred by the Participant for such Plan Year under Section 4.1, the Participant may not revoke such Deferral election during the Plan Year, except to the extent that such revocation would be allowable by the provisions of this subparagraph 4.2.3.
 
 	4.2.3.2.	Unforeseeable Emergency.	
   The Committee may cancel a Participant’s Participation Agreement pursuant to the provisions of Treasury Regulation Section 1.409A-3(j)(4)(viii) (or any successor guidance subsequently issued including revised Treasury Regulations or other administrative guidance issued pursuant thereto) in connection with the Participant’s Unforeseeable Emergency. To the extent required pursuant to the application of Treasury Regulation Section 1.401(k)-1(d)(3) (or any successor guidance subsequently issued including revised Treasury Regulations or other administrative guidance issued pursuant thereto), a Participant’s Participation Agreement shall be automatically cancelled for a period of one year (or any such longer period as may be required by the applicable Code and regulations) following the date on which the Participant receives a hardship withdrawal from the 401(k) Plan maintained by the Company, and no amount shall be withheld from any payment of Base Pay and/or Bonus Compensation that becomes payable during such period.
 
 	4.2.3.3.	Disability.	
   The Committee may cancel a Participant’s Participation Agreement pursuant to the provisions of Treasury Regulation Section 1.409A-3(j)(4)(xii) (or any successor guidance subsequently issued including revised Treasury Regulations or other administrative guidance issued pursuant thereto) in connection with the Participant’s Disability. Such cancellation must occur by the later of the end of the Participant’s taxable year in which, or the 15th day of the third month following the date on which, the Participant incurs a Disability.
 
 	4.2.3.4.	Final Pay Check Due to Termination of Employment.	
   A Participant whose employment terminates prior to the date any remuneration which he/she elected to defer would have been paid to him/her shall be paid such remuneration in cash instead of deferring it into the Plan.
 
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A cancellation pursuant to this subparagraph 4.2.3 shall apply only to Base Pay and/or Bonus Compensation not yet earned.
 
 	4.3.	Modification or Revocation of Election by Participant.	
A Participant may not change the amount of his/her Base Pay Deferrals or Bonus Deferrals at any time during a Plan Year.
 
 	4.4.	Matching Contributions.	
For each Plan Year, the Account of each Participant shall be credited with a Matching Contribution equal to such amount, if any, as the Company shall determine based on the Participant’s Deferrals for such Plan Year.
 
 	4.5.	Company Profit Sharing Contribution.	
For each Plan Year, the Account of each Participant shall be credited with a Company Profit Sharing Contribution equal to such amount, if any, as the Company shall determine in its complete and sole discretion.
 
 	4.6.	Other Company Contributions.	
For each Plan Year, the Account of each Participant shall be credited with an Other Company Contribution equal to such amount, if any, as the Company shall determine in its complete and sole discretion.
 
5.	VESTING, DEFERRAL PERIODS AND INVESTMENT ELECTIONS	
 
 	5.1.	Vesting.	
All provisions of the Plan relating to the distribution of a Participant’s Account shall mean only the vested portion of such Account. Since the Plan is unfunded, the portion of a Participant’s Account which is not vested and therefore not distributed with the vested portion of his/her Account shall remain property of the Company and not be allocated to Accounts of other Participants or otherwise inure to their benefit.
 
 	5.1.1.	Participant Deferrals.	
A Participant shall be one hundred percent (100%) vested at all times in the amount of his/her Account which is attributable to his/her Deferrals.
 
 	5.1.2.	Matching Contributions.	
A Participant shall vest in his/her Matching Contributions, if any, for a Plan Year in accordance with the vesting provisions of the 401(k) Plan applicable to the vesting of matching contributions thereunder.
 
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 	5.1.3.	Company Profit Sharing Contributions.	
A Participant shall vest in his/her Company Profit Sharing Contributions, if any, for a Plan Year in accordance with the vesting provisions of the 401(k) Plan applicable to the vesting of profit sharing contributions thereunder.
 
 	5.1.4.	Other Contributions.	
A Participant shall vest in his/her Other Contributions, if any, for a Plan Year in accordance with any relevant vesting schedule determined by the Committee from time to time.
 
 	5.1.5.	Accelerated Vesting.	
Notwithstanding anything to the contrary, a Participant’s Account shall become one hundred percent (100%) vested upon his/her:
 
 	5.1.5.1.	Death while employed;	
 
 	5.1.5.2.	Disability while employed; or	
 
 	5.1.5.3.	Retirement Date while employed.	
 
 	5.2.	Election of In-Service Distribution.	
 
 	5.2.1.	Election .	
If a Participant desires an in-service distribution of all or a percentage of his/her Deferrals for any given Plan Year, including earnings on such Deferrals, he/she must elect such in-service distribution on his/her Participation Agreement for such Plan Year. In the case of any such election, the Deferral Period must be for at least two (2) years. Notwithstanding anything to the contrary, if the Participant elects an in-service distribution and is entitled to such a distribution pursuant to such election prior to the required distributable events listed in Section 7.1, distribution pursuant to such in-service distribution election shall not include Matching Contributions, Company Profit Sharing Contributions and/or Other Contributions and earnings on Matching Contributions, Company Profit Sharing Contributions and/or Other Contributions and must always be made in a lump sum on the date requested by the Participant, unless such day falls on a weekend or holiday and then it shall be made on the next following business day.
 
 	5.2.2.	Subsequent Deferral Election of In-Service Distribution .	
A Participant may elect to extend a Deferral Period previously selected under paragraph 5.2.1 immediately above for an in-service distribution by filing an Election to Extend Deferral Period Form (or any successor form thereto from time to time) with the Company that specifies the later fixed date on which the Deferral Period for such in-service distribution will expire. This Election to Extend Deferral Period Form must be filed at least one year ( i.e. , twelve (12) months) before the expiration of the original Deferral Period specified by the Participant under paragraph 5.2.1 immediately above with respect to such in-service distribution. This Election to Extend Deferral Period Form will not be effective until at least one year ( i.e. , twelve
 
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(12) months) after the date on which such form has been filed. Under the Election to Extend Deferral Period Form, all payments scheduled under the extended specified, fixed date for a given in-service distribution must occur five (5) years or later from the date such payment was originally scheduled to be received under the then designated and enforceable specified, fixed date election for such in-service distribution. A Participant may make multiple subsequent deferral elections under this paragraph 5.2.2 for any given in-service distribution but any time requirements set forth herein must be separately satisfied with respect to each subsequent distribution election. Notwithstanding the foregoing, subsequent deferral elections made on an Election to Extend Deferral Period Form must comply, at all times, with Code Section 409A, any regulations issued with respect to Code Section 409A and any other guidance issued the IRS and authoritative on the issue.
 
 	5.3.	Investment Elections.	
 
 	5.3.1.	Manner of Investment .	
All amounts credited to the Accounts of Participants shall be treated as though invested and reinvested only in Permissible Investments.
 
 	5.3.2.	Investment Decisions, Earnings and Expenses .	
Investments in which the Accounts of Participants shall be treated as invested and reinvested shall be directed by the Participant in Permissible Investments as designated in the Participation Agreement or otherwise designated by the Committee from time to time. A Participant may elect different investment allocations for new contributions and existing Account balances. Only whole percentages may be elected, and the total elections must allocate 100% of all new contributions and 100% of all existing Account balances. In the event a Participant fails to allocate one hundred percent (100%) of his or her Account, he or she shall conclusively be deemed to have elected that any unallocated amounts in his or her Account be hypothetically invested in the default fund designated by the Company from time to time. Investment elections may be changed once per month in accordance with the procedures set forth by the Committee from time to time. Any change shall be effective prospectively only. All dividends, interest, gains, and distributions of any nature that would be earned on a Permissible Investment will be credited to the Account as though reinvested in additional shares of that Permissible Investment. Expenses that would be attributable to such investments shall be charged to the Account of the Participant. The Committee may change Permissible Investments at any time in its sole discretion, and may adopt procedures with respect to Participant’s investment decisions, including procedures providing for the investment of the Account of a Participant who does not make an investment decision Under no circumstances whatsoever shall the Company or the Committee, or any of their employees, have any liability for any investment losses incurred by any Participant (including without limitation any loss alleged to have resulted from the negligence, gross negligence, or recklessness of any such person). A Participant’s Account shall be adjusted as of each Valuation Date to reflect investment gains and losses.
 
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6.	ACCOUNTS	
 
 	6.1.	Establishment of Bookkeeping Accounts.	
A separate bookkeeping Account shall be maintained for each Participant. Such account shall be:
 
 	6.1.1.	credited with the Deferrals, Matching Contributions, Company Profit Sharing Contributions, and Other Company Contributions;	
 
 	6.1.2.	credited (or reduced by, as the case may be) with the hypothetical investment gains/losses determined pursuant to Section 5.3; and	
 
 	6.1.3.	reduced by the distributions made to or with respect to a Participant.	
 
 	6.2.	Subaccounts.	
Within each Participant’s bookkeeping Account, separate subaccounts shall be maintained to the extent necessary for the administration of the Plan.
 
 	6.3.	Hypothetical Nature of Accounts.	
The Account established under this Section 6 shall be hypothetical in nature and shall be maintained for bookkeeping purposes only, so that Deferrals, Matching Contributions, and Company Profit Sharing Contributions, and Other Company Contributions can be credited to the Participant and so that gains and losses on such amounts so credited can be credited or charged, as the case may be. Neither the Plan nor any of the Accounts (or subaccounts) shall hold any actual funds or assets. The right of any person to receive one or more payments under the Plan shall be an unsecured claim against the general assets of the Company. Any liability of the Company to any Participant, former Participant, or Beneficiary with respect to a right to payment shall be based solely upon contractual obligations created by the Plan. Neither the Company, the Board, nor any other person shall be deemed to be a trustee of any amounts to be paid under the Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company and a Participant, former Participant, Beneficiary, or any other person.
 
7.	PAYMENT OF ACCOUNT	
 
 	7.1.	Distribution of Contribution to 401(k) Plan.	
As soon as practicable, but in no event later than March 15 of the Plan Year following the Plan Year for which the Participant executed a Participation Agreement with respect to a given Plan Year, the lesser of:
 
 	7.1.1.	the allowable before-tax contribution which may be made on behalf of the Participant to the 401(k) Plan for the Plan Year for which the Participant executed the Participation Agreement; and	
 
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 	7.1.2.	the sum of the Base Pay Deferrals and Bonus Deferrals for such Plan Year for which the Participant executed such Participation Agreement, shall be paid directly to Participant as compensation earned in the Plan Year for which the Participant executed the Participation Agreement, unless the Participant previously elected (in both the Participation Agreement and his/her 401(k) Plan deferral elections) to have such amount contributed to the 401(k) Plan as an elective before-tax contribution. If the Participant elected to have such amount contributed to the 401(k) Plan as an elective before-tax contribution, such amount together with an amount equal to the applicable Matching Contributions (but not in excess of the matching contributions that would have been made on such amounts under the 401(k) Plan) shall be distributed directly to the Participant’s account within the 401(k) Plan and the appropriate subaccounts (i.e., participant deferral account and matching contribution account) of Participant’s account within the 401(k) Plan shall be debited accordingly. Notwithstanding the preceding, the Plan shall not make distributions to the Participant or to the 401(k) Plan in excess of the Participant’s Account balance under this Plan. Distributions pursuant to this paragraph 7.1.1 may be made in one or more installments.	
 
 	7.2.	Length of Deferral Period (i.e., Timing of Distributions) .	
Distribution of that portion of a Participant’s Account for which an in-service distribution has been elected for a given Plan Year pursuant to Section 5.2 above shall be made at the time specified in such Participation Agreement election unless the Participant’s employment terminates prior to such time, in which event the remaining provisions of this Section 7.2 shall apply. Except as otherwise provided, payment of the Participant’s Account shall commence no later than sixty (60) days following the earliest to occur of the following events:
 
 	7.2.1.	the Participant’s death;	
 
 	7.2.2.	the Participant’s Disability; or	
 
 	7.2.3.	the Participant’s termination from service with the Company.	
Such Account shall be valued as of the Valuation Date commensurate with the payment date. Notwithstanding the foregoing, if the Participant is a Specified Employee, any amounts payable to the Participant under this Section 7.2 during the first six months and one day following such Participant’s date of termination shall be further deferred until the date which is six months and one day following such Participant’s termination, and if such payments are required to be so deferred the first payment will be in an amount equal to the total amount to which the Participant would otherwise have been entitled during the period following the Participant’s date of termination of employment if deferral had not been required.
 
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 	7.3.	Form of Payment.	
 
 	7.3.1.	General Rule.	
At the time a Participant files a Participation Agreement for a given Plan Year, the Participant must elect the form in which the Participant’s entire Account will be distributed if such distribution event occurs due to reason of the Participant’s termination of service which includes his/her death, Disability or Retirement Date. The Participant must elect either:
 
 	7.3.1.1.	A lump sum payment; or	
 
 	7.3.1.2.	Substantially equal monthly installments over a period of sixty (60), one hundred twenty (120), or one hundred eighty (180) months or substantially equal annual installments over a period of five (5), ten (10), or fifteen (15) years. Earnings on the unpaid balance shall continue to be credited to subaccounts at the appropriate earning rate, in accordance with the Participant’s investment election. For purposes of the Plan and Code Section 409A, the right to a series of installment payments is to be treated as a right to a series of separate payments.	
If a former Participant is receiving an installment form of distribution and dies prior to the distribution of his/her entire Account, the installment distributions will be continued to his/her Beneficiary.
 
 	7.3.2.	Subsequent Change in Form Election.	
A Participant may elect to change his/her form of distribution (i.e., from lump sum to installments or vice versa) by filing an Election to Change Form of Distribution (or any successor form thereto from time to time) with the Company the newly elected form of distribution. This Election to Change Form of Distribution must be filed at least one year ( i.e. , twelve (12) months) before the expiration of the then designated and enforceable Deferral Period specified by the Participant under Section 7.2 subject to Section 5.2. This Election to Change Form of Distribution will not be effective until at least one year ( i.e. , twelve (12) months) after the date on which such form has been filed. Under the Election to Change Form of Distribution, any change in form of distribution ( i.e. , from lump sum to installments or vice versa) cannot accelerate any payment scheduled under the then designated and enforceable Deferral Period and shall additionally require an automatic delay in the timing of distribution to five (5) years from the date all such payments are then scheduled to be made under then designated and enforceable Deferral Period. A Participant may make multiple subsequent change in form elections under this paragraph 7.3.2 but any time requirements set forth herein must be separately satisfied with respect to each subsequent distribution election. Notwithstanding the foregoing, subsequent change in form elections made on an Election to Change Form of Distribution must comply, at all times, with Code Section 409A, any regulations issued with respect to Code Section 409A and any other guidance issued the IRS and authoritative on the issue.
 
 	7.4.	No Acceleration Of Benefits.	
Notwithstanding any other terms in this Plan document, the Plan does not permit the acceleration of the time or schedule of any payment under the Plan, except as may be allowed by Treasury Regulations or any other Department of Treasury or IRS guidance issued under Code Section 409A.
 
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 	7.5.	Small Account.	
Notwithstanding anything to the contrary in this Plan, if the total of a Participant’s vested, unpaid Account balance as of the time the payments are to commence from the Participant’s Account pursuant to Section 7.2 are less than $10,000, the remaining unpaid, vested Account shall be paid in a lump sum paid no later than sixty (60) days immediately following the date of termination, notwithstanding any election by the Participant to the contrary.
 
 	7.6.	Designation of Beneficiaries.	
 
 	7.6.1.	General Designation Rule.	
Each Participant shall have the right, at any time, to designate one (1) or more persons or an entity as Beneficiary (both primary as well as secondary) to whom benefits under this Plan shall be paid in the event of a Participant’s death prior to complete distribution of the Participant’s Account. Each Beneficiary designation shall be in a written form prescribed by the Committee and will be effective only when filed with and received by the Committee during the Participant’s lifetime. In case of a Participant who is a resident of a community property state, designation by a married Participant of a Beneficiary other than the Participant’s spouse shall not be effective unless the spouse executes a written consent that acknowledges the effect of the designation and is witnessed by a notary public, or the consent cannot be obtained because the spouse cannot be located.
 
 	7.6.2.	Amendments.	
Except as provided below, any nonspousal designation of Beneficiary may be changed by a Participant without the consent of such Beneficiary by the filing of a new designation with the Committee. The filing of a new designation shall cancel all designations previously filed.
 
 	7.6.3.	Change in Marital Status.	
If the marital status of a Participant residing in a community property state changes after the Participant has designated a Beneficiary, the following shall apply:
 
 	7.6.3.1.	If the Participant is married at death but was unmarried when the designation was made, the designation shall be void unless the spouse has consented to it in the manner prescribed above.	
 
 	7.6.3.2.	If the Participant is unmarried at death but was married when the designation was made:	
(A) The designation shall be void if the spouse was named as Beneficiary.
 
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(B) The designation shall remain valid if a nonspouse Beneficiary was named.
If the Participant was married when the designation was made and is married to a different spouse at death, the designation shall be void unless the new spouse has consented to it in the manner prescribed above.
 
 	7.6.4.	No Beneficiary Designation.	
If any Participant fails to designate a Beneficiary in the manner provided above, or if the Beneficiary designated by a deceased Participant dies before the Participant or before complete distribution of the Participant’s benefits, the Participant’s Beneficiary shall be the person in the first of the following classes in which there is a survivor:
 
 	7.6.4.1.	The Participant’s surviving spouse;	
 
 	7.6.4.2.	The Participant’s children in equal shares, except that if any of the children predeceases the Participant but leaves issue surviving, then such issue shall take by right of representation the share the parent would have taken if living;	
 
 	7.6.4.3.	The Participant’s estate.	
 
 	7.7.	Unclaimed Benefits.	
In the case of a benefit payable on behalf of such Participant, if the Committee is unable to locate the Participant or Beneficiary to whom such benefit is payable, such benefit may be forfeited to the Company, upon the Committee’s determination. Notwithstanding the foregoing, if subsequent to any such forfeiture the Participant or Beneficiary to whom such benefit is payable makes a valid claim for such benefit, such forfeited benefit shall be paid by the Company or restored to the Plan by the Company.
 
 	7.8.	Unforeseeable Emergency Withdrawals. 	
A Participant may apply in writing to the Committee for, and the Committee may permit, a withdrawal for an Unforeseeable Emergency of all (valued as of the last day of the month prior to the month in which the application is made) or any part of a Participant’s Account if the Committee, in its sole discretion, determines that the Participant has incurred an Unforeseeable Emergency. The amount that may be withdrawn shall be limited to the amount reasonably necessary to relieve the hardship or financial emergency upon which the request is based, plus the federal and state taxes due on the withdrawal, as determined by the Committee. The Committee may require a Participant who requests such a withdrawal to submit such evidence as the Committee, in its sole discretion, deems necessary or appropriate to substantiate the circumstances upon which the request is based.
 
 	7.9.	Withholding.	
All Deferrals and distributions shall be subject to legally required income and employment tax withholding. Such taxes shall include, but not necessarily be limited to,
 
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Social Security taxes on Deferrals, Matching Contributions, Company Profit Sharing Contributions and/or Other Contributions at the time they are vested and income taxes on distributions.
 
8.	ADMINISTRATION	
 
 	8.1.	Committee.	
The Plan shall be administered by a Committee, which shall be appointed by and serve at the pleasure of the Board. The Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof. The Committee may delegate to others certain aspects of the management and operational responsibilities of the Plan including the employment of advisors and the delegation of ministerial duties to qualified individuals, provided that such delegation is in writing. No member of the Committee who is a Participant shall participate in any matter relating to his status as a Participant or his rights or entitlement to benefits as a Participant.
 
 	8.2.	General Powers of Administration.	
The Committee shall have all powers necessary or appropriate to enable it to carry out its administrative duties. Not in limitation, but in application of the foregoing, the Committee shall have discretionary authority to construe and interpret the Plan and determine all questions that may arise hereunder as to the status and rights of Employees, Participants, and Beneficiaries. The Committee may exercise the powers hereby granted in its sole and absolute discretion. The Committee may promulgate such regulations as it deems appropriate for the operation and administration of the Plan. No member of the Committee shall be personally liable for any actions taken by the Committee unless the member’s action involves gross negligence or willful misconduct.
 
 	8.3.	Indemnification of Committee.	
The Company shall indemnify the members of the Committee against any and all claims, losses, damages, expenses, including attorney’s fees, incurred by them, and any liability, including any amounts paid in settlement with their approval, arising from their action or failure to act, except when the same is judicially determined to be attributable to their gross negligence or willful misconduct.
 
9.	DETERMINATION OF BENEFITS, CLAIMS PROCEDURE AND ADMINISTRATION	
 
 	9.1.	Claims.	
A Participant, beneficiary or other person who believes that he/she is being denied a benefit to which he/she is entitled (hereinafter referred to as “Claimant”), or his/her duly authorized representative, may file a written request for such benefit with the Committee setting forth his/her claim. The request must be addressed to the Committee at the Company at its then principal place of business.
 
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 	9.2.	Claim Decision.	
Upon receipt of a claim, the Committee shall advise the Claimant that a reply will be forthcoming within a reasonable period of time, but ordinarily not later than ninety days, and shall, in fact, deliver such reply within such period. However, the Committee may extend the reply period for an additional ninety days for reasonable cause. If the reply period will be extended, the Committee shall advise the Claimant in writing during the initial 90-day period indicating the special circumstances requiring an extension and the date by which the Committee expects to render the benefit determination. If the claim is denied in whole or in part, the Committee will render a written opinion, using language calculated to be understood by the Claimant, setting forth:
 
 	9.2.1.	the specific reason or reasons for the denial;	
 
 	9.2.2.	the specific references to pertinent Plan provisions on which the denial is based;	
 
 	9.2.3.	description of any additional material or information necessary for the Claimant to perfect the claim and an explanation as to why such material or such information is necessary;	
 
 	9.2.4.	appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review, including a statement of the Claimant’s right to bring a civil action under Section 502(a) of ERISA following an adverse benefit determination on review; and	
 
 	9.2.5.	the time limits for requesting a review of the denial under Section 9.3 and for the actual review of the denial under Section 9.4.	
 
 	9.3.	Request for Review.	
Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Secretary of the Company (“Secretary”) review the Committee’s prior determination. Such request must be addressed to the Secretary at the Company at its then principal place of business. The Claimant or his/her duly authorized representative may submit written comments, documents, records or other information relating to the denied claim, which such information shall be considered in the review under this Section without regard to whether such information was submitted or considered in the initial benefit determination. The Claimant or his/her duly authorized representative shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information which:
 
 	9.3.1.	was relied upon by the Committee in making its initial claims decision;	
 
 	9.3.2.	was submitted, considered or generated in the course of the Committee making its initial claims decision, without regard to whether such instrument was actually relied upon by the Committee in making its decision; or	
 
 	9.3.3.	demonstrates compliance by the Committee with its administrative processes and safeguards designed to ensure and to verify that benefit claims determinations are made in accordance with governing Plan documents and that, where appropriate, the Plan provisions have been applied consistently with respect to similarly situated claimants.	
 
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If the Claimant does not request a review of the Committee’s determination within such sixty-day period, he or she shall be barred and estopped from challenging such determination.
 
 	9.4.	Review of Decision.	
Within a reasonable period of time, ordinarily not later than sixty days, after the Secretary’s receipt of a request for review, it will review the Committee’s prior determination. If special circumstances require that the sixty-day time period be extended, the Secretary will so notify the Claimant within the initial 60-day period indicating the special circumstances requiring an extension and the date by which the Secretary expects to render its decision on review, which shall be as soon as possible but not later than 120 days after receipt of the request for review. In the event that the Secretary extends the determination period on review due to a Claimant’s failure to submit information necessary to decide a claim, the period for making the benefit determination on review shall not take into account the period beginning on the date on which notification of extension is sent to the Claimant and ending on the date on which the Claimant responds to the request for additional information. Benefits under the Plan will be paid only if the Secretary decides in its discretion that the Claimant is entitled to such benefits. The decision of the Secretary shall be final and non-reviewable, unless found to be arbitrary and capricious by a court of competent review. Such decision will be binding upon the Employer and the Claimant. If the Secretary makes an adverse benefit determination on review, the Secretary will render a written opinion, using language calculated to be understood by the Claimant, setting forth:
 
 	9.4.1.	the specific reason or reasons for the denial;	
 
 	9.4.2.	the specific references to pertinent Plan provisions on which the denial is based;	
 
 	9.4.3.	a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information which:	
 
 	9.4.3.1.	was relied upon by the Secretary in making its decision;	
 
 	9.4.3.2.	was submitted, considered or generated in the course of the Secretary making its decision, without regard to whether such instrument was actually relied upon by the Secretary in making its decision; or	
 
 	9.4.3.3.	demonstrates compliance by the Secretary with its administrative processes and safeguards designed to ensure and to verify that benefit claims determinations are made in accordance with governing Plan documents, and that, where appropriate, the Plan provisions have been applied consistently with respect to similarly situated claimants; and	
 
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 	9.4.4.	a statement of the Claimant’s right to bring a civil action under Section 502(a) of ERISA following the adverse benefit determination on such review.	
 
 	9.5.	Discretionary Authority.	
The Committee and Secretary shall both have discretionary authority to determine a Claimant’s entitlement to benefits upon his/her claim or his/her request for review of a denied claim, respectively.
 
10.	MISCELLANEOUS	
 
 	10.1.	Plan Not a Contract of Employment.	
The adoption and maintenance of the Plan shall not be or be deemed to be a contract between the Company and any person or to be consideration for the employment of any person. Nothing herein contained shall give or be deemed to give any person the right to be retained in the employ of the Company or to restrict the right of the Company to discharge any person at any time; nor shall the Plan give or be deemed to give the Company the right to require any person to remain in the employ of the Company or to restrict any person’s right to terminate his employment at any time.
 
 	10.2.	Non-Assignability of Benefits.	
No Participant, Beneficiary or distributee of benefits under the Plan shall have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber any part or all of the amounts payable hereunder, which are expressly declared to be unassignable and non-transferable. Any such attempted assignment or transfer shall be void. No amount payable hereunder shall, prior to actual payment thereof, be subject to seizure by any creditor of any such Participant, Beneficiary or other distributee for the payment of any debt, judgment, or other obligation, by a proceeding at law or in equity, nor transferable by operation of law in the event of the bankruptcy, insolvency or death of such Participant, Beneficiary or other distributee hereunder.
 
 	10.3.	Amendment and Termination.	
The Board may from time to time, in its discretion, amend, in whole or in part, any or all of the provisions of the Plan; provided, however, that no amendment may be made which would impair the rights of a Participant with respect to amounts already allocated to his/her Account. The Board may terminate the Plan at any time so long as such termination complies fully with the provisions of Code Section 409A and the underlying final regulations. In the event that the Plan is terminated, the balance in a Participant’s Account shall be paid to such Participant or his/her Beneficiary in a lump sum or in equal monthly installments as the Committee determines and otherwise in accordance with Code Section 409A and the underlying final regulations.
 
 	10.4.	Unsecured General Creditor Status Of Employee.	
The payments to Participant, his Beneficiary or any other distributee hereunder shall be made from assets which shall continue, for all purposes, to be a part of the general, unrestricted assets of the Company; no person shall have nor acquire any interest in any such
 
22

assets by virtue of the provisions of this Agreement. The Company’s obligation hereunder shall be an unfunded and unsecured promise to pay money in the future. To the extent that the Participant, a Beneficiary, or other distributee acquires a right to receive payments from the Company under the provisions hereof, such right shall be no greater than the right of any unsecured general creditor of the Company; no such person shall have nor require any legal or equitable right, interest or claim in or to any property or assets of the Company. In the event that, in its discretion, the Company purchases an insurance policy or policies insuring the life of the Participant (or any other property) to allow the Company to recover the cost of providing the benefits, in whole, or in part, hereunder, neither the Participant, his Beneficiary or other distributee shall have nor acquire any rights whatsoever therein or in the proceeds therefrom. The Company shall be the sole owner and beneficiary of any such policy or policies and, as such, shall possess and may exercise all incidents of ownership therein. No such policy, policies or other property shall be held in any trust for a Participant, Beneficiary or other distributee or held as collateral security for any obligation of the Company hereunder.
 
 	10.5.	Severability.	
If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions hereof; instead, each provision shall be fully severable and the Plan shall be construed and enforced as if said illegal or invalid provision had never been included herein.
 
 	10.6.	Governing Laws.	
All provisions of the Plan shall be construed in accordance with the laws of Illinois except to the extent preempted by federal law.
 
 	10.7.	Binding Effect.	
This Plan shall be binding on each Participant and his/her heirs and legal representatives and on the Company and its successors and assigns.
 
 	10.8.	Entire Agreement.	
This document and any amendments contain all the terms and provisions of the Plan and shall constitute the entire Plan, any other alleged terms or provisions being of no effect.
 
 	10.9.	No Guarantee of Tax Consequences.	
While the Company has established, and will maintain the Plan, the Company makes no representation, warranty, commitment, or guaranty concerning the income, employment, or other tax consequences of participation in the Plan under federal, state, or local law.
 
23

 	10.10.	Sole Obligor.	
Each Company shall be the sole obligor with respect to Plan benefits that are owed to a Participant which arise by virtue of contributions made by such Company or the Participant’s employment by such Company.
IN WITNESS WHEREOF , the Company has caused this Plan to be executed on the 23 rd day of December, 2008.

LKQ CORPORATION	
		
By:	 	/s/ Victor M. Casini	
Title:	 	Senior Vice President	
 
24

EXHIBIT 12.1
LKQ CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(In Thousands, Except Ratios)
(Unaudited)

 	  	Years Ended December 31,	 	
 	  	2004	  	2005	  	2006	  	2007	 	 	2008	 	
Income before provision for income taxes	  	$	33,857	  	$	51,683	  	$	72,821	  	$	108,271	 	 	$	163,588	 	
Fixed charges	  	 	4,883	  	 	6,677	  	 	13,197	  	 	28,865	 	 	 	57,101	 	
Amortization of capitalized interest, net of interest capitalized	  	 	—  	  	 	—  	  	 	—  	  	 	(425	)	 	 	(93	)	
	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	 	 	
Earnings available for fixed charges	  	$	38,740	  	$	58,360	  	$	86,018	  	$	136,711	 	 	$	220,596	 	
	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	 	 	
Fixed charges:	  			  			  			  				 				
Interest expense, including amortization of debt issuance costs	  	$	1,551	  	$	2,228	  	$	5,955	  	$	17,758	 	 	$	37,846	 	
Capitalized interest	  	 	—  	  	 	—  	  	 	—  	  	 	425	 	 	 	108	 	
Portion of rental expense representative of interest	  	 	3,332	  	 	4,449	  	 	7,242	  	 	10,682	 	 	 	19,147	 	
	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	 	 	
Total fixed charges	  	$	4,883	  	$	6,677	  	$	13,197	  	$	28,865	 	 	$	57,101	 	
	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	 	 	
Ratio of earnings to fixed charges	  	 	7.9	  	 	8.7	  	 	6.5	  	 	4.7	 	 	 	3.9	 	

EXHIBIT 21.1
LIST OF SUBSIDIARIES OF
LKQ CORPORATION

Subsidiary	  	Jurisdiction	  	Assumed Names	
1	  	1323342 Alberta ULC	  	Alberta	  		
2	  	1323352 Alberta ULC	  	Alberta	  		
3	  	1323410 Alberta ULC	  	Alberta	  		
4	  	A-Reliable Auto Parts & Wreckers, Inc.	  	Illinois	  	LKQ Self Service Auto Parts-Rockford	
5	  	Accu-Parts LLC	  	New York	  		
6	  	Akron Airport Properties, Inc.	  	Ohio	  		
7	  	B&D Automotive International, Inc.	  	New York	  		
8	  	Bodymaster Auto Parts, Inc.	  	New Jersey	  		
9	  	Bodymaster Auto Parts Supply, Inc.	  	Maryland	  		
10	  	Budget Auto Parts U-Pull-It, Inc.	  	Louisiana	  		
11	  	C.A. Shaw Inc	  	Ontario	  		
12	  	Car Body Concepts, Inc.	  	Florida	  		
13	  	Chambers Parts Distributors	  	Maine	  		
14	  	Damron Holding Company, LLC	  	Delaware	  	LKQ North Florida; LKQ Melbourne; LKQ Service Center Crystal River; LKQ Fort Myers	
15	  	DAP Trucking, LLC	  	Florida	  		
16	  	Distribuidora Hermanos Copher Internacional, SA	  	Costa Rica	  		
17	  	Double R Auto Sales, Inc.	  	Florida	  		
18	  	Fenders and More, Inc.	  	Tennessee	  		
19	  	Fit-Rite Body Parts, Inc.	  	New Jersey	  		
20	  	FM Acquisition Corporation	  	Tennessee	  		
21	  	Global Trade Alliance, Inc.	  	Ohio	  		
22	  	Headline Auto Parts Ltd.	  	Ontario	  		
23	  	Hermanos Copher Internacional, SA	  	Guatemala	  		
24	  	Inteuro Parts Distributors, Inc.	  	Florida	  		
25	  	KAI China LLC	  	Delaware	  		
26	  	Keystone Automotive de Mexico, Sociedad de Responsabilidad Limitada de Capital Variable	  	Mexico	  		
27	  	Keystone Automotive Industries, Inc.	  	California	  		
28	  	Keystone Automotive Industries BC, Inc.	  	British Columbia	  		
29	  	Keystone Automotive Industries CDN, Inc.	  	Ontario	  		
30	  	Keystone Automotive Industries FL, Inc.	  	Florida	  		
31	  	Keystone Automotive Industries MN, Inc.	  	Minnesota	  		
32	  	Keystone Automotive Industries Nevada, Inc.	  	Nevada	  		
33	  	Keystone Automotive Industries OH, Inc.	  	Ohio	  		
34	  	Keystone Automotive Industries ON, Inc.	  	Ontario	  		
35	  	Keystone Automotive Industries QC, Inc.	  	Quebec	  		
36	  	Keystone Automotive Industries Resources, Inc.	  	Delaware	  		
37	  	Keystone Automotive Industries TN, Inc.	  	Tennessee	  		
38	  	LKQ 1 st Choice Auto Parts, LLC	  	Oklahoma	  		
39	  	LKQ 250 Auto, Inc.	  	Ohio	  		
40	  	LKQ A&R Auto Parts, Inc.	  	South Carolina	  		
41	  	LKQ All Models Corp.	  	Arizona	  	Wholesale Auto Recyclers; Cars ‘n More	
42	  	LKQ Apex Auto Parts, Inc.	  	Oklahoma	  		
43	  	LKQ Atlanta, L.P.	  	Delaware	  	LKQ Carolina	
44	  	LKQ Auto Parts of Central California, Inc.	  	California	  		
45	  	LKQ Auto Parts of Memphis, Inc.	  	Arkansas	  	LKQ of Tennessee	
46	  	LKQ Auto Parts of North Texas, Inc.	  	Delaware	  		
47	  	LKQ Auto Parts of North Texas, L.P.	  	Delaware	  	LKQ Auto Parts of Central Texas	
48	  	LKQ Auto Parts of Orlando, LLC	  	Florida	  	LKQ Self Service Auto Parts-Orlando	
49	  	LKQ Auto Parts of Utah, LLC	  	Utah	  		

							
50	  	LKQ Best Automotive Corp.	  	Delaware	  	LKQ Auto Parts of South Texas; A-1 Auto Salvage Pick & Pull; The Engine & Transmission Store	
51	  	LKQ Birmingham, Inc.	  	Alabama	  	LKQ Gulf Coast	
52	  	LKQ Brad’s Auto & Truck Parts, Inc.	  	Oregon	  		
53	  	LKQ Broadway Auto Parts, Inc.	  	New York	  		
54	  	LKQ Copher Self Service Auto Parts-Bradenton Inc.	  	Florida	  		
55	  	LKQ Copher Self Service Auto Parts-Clearwater Inc.	  	Florida	  		
56	  	LKQ Copher Self Service Auto Parts-St. Petersburg Inc.	  	Florida	  		
57	  	LKQ Copher Self Service Auto Parts-Tampa Inc.	  	Florida	  		
58	  	LKQ Crystal River, Inc.	  	Florida	  	LKQ Fort Myers	
59	  	LKQ Delaware LLP	  	Delaware	  		
60	  	LKQ Dominion Auto Recycling, Inc.	  	Ontario	  		
61	  	LKQ Foster Auto Parts, Inc.	  	Oregon	  	LKQ U-Pull-It Auto Wrecking; U-Pull-It Auto Wrecking	
62	  	LKQ Foster Auto Parts Salem, Inc.	  	Oregon	  	Foster Auto Parts Salem	
63	  	LKQ Foster Auto Parts Westside LLC	  	Oregon	  		
64	  	LKQ Gorham Auto Parts Corp.	  	Maine	  		
65	  	LKQ Great Lakes Corp.	  	Indiana	  	LKQ Star Auto Parts	
66	  	LKQ Heavy Truck-Texas Best Diesel, LP	  	Texas	  		
67	  	LKQ Holding Co.	  	Delaware	  		
68	  	LKQ Hunts Point Auto Parts Corp.	  	New York	  	Partsland USA; LKQ Auto Parts of Eastern Pennsylvania; LKQ Auto Parts	
69	  	LKQ Lakenor Auto & Truck Salvage, Inc.	  	California	  	LKQ of Southern California; LKQ of Las Vegas	
70	  	LKQ Management Company	  	Delaware	  		
71	  	LKQ Metro, Inc.	  	Illinois	  		
72	  	LKQ Mid-America Auto Parts, Inc.	  	Kansas	  	Mabry Auto Salvage	
73	  	LKQ Midwest Auto Parts Corp.	  	Nebraska	  	Midwest Foreign Auto; LKQ Midwest Auto	
74	  	LKQ Minnesota, Inc.	  	Minnesota	  	LKQ Albert Lea	
75	  	LKQ of Indiana, Inc.	  	Indiana	  	LKQ Self Service Auto Parts-South Bend	
76	  	LKQ of Michigan Inc.	  	Michigan	  		
77	  	LKQ of Nevada, Inc.	  	Nevada	  		
78	  	LKQ of Tennessee, Inc.	  	Tennessee	  		
79	  	LKQ Online Corp.	  	Delaware	  		
80	  	LKQ Ontario LP	  	Ontario	  		
81	  	LKQ Penn-Mar, Inc.	  	Pennsylvania	  		
82	  	LKQ Pintendre Auto, Inc.	  	Quebec	  		
83	  	LKQ Powertrain, Inc.	  	Delaware	  		
84	  	LKQ Raleigh Auto Parts Corp.	  	North Carolina	  		
85	  	LKQ Route 16 Used Auto Parts, Inc.	  	Massachusetts	  		
86	  	LKQ Salisbury, Inc.	  	North Carolina	  	LKQ of Carolina	
87	  	LKQ Savannah, Inc.	  	Georgia	  		
88	  	LKQ Self Service Auto Parts-Memphis LLC	  	Tennessee	  		
89	  	LKQ Self Service Auto Parts-Tulsa, Inc.	  	Oklahoma	  		
90	  	LKQ Self Service Auto Parts-Holland, Inc.	  	Michigan	  		
91	  	LKQ Self Service Auto Parts-Kalamazoo, Inc.	  	Michigan	  		
92	  	LKQ Smart Parts, Inc.	  	Delaware	  		
93	  	LKQ Triplett ASAP, Inc.	  	Ohio	  		
94	  	LKQ U-Pull-It Damascus, Inc.	  	Oregon	  	U-Pull-It Auto Damascus	
95	  	LKQ U-Pull-It Tigard, Inc.	  	Oregon	  		
96	  	LKQ West Michigan Auto Parts, Inc.	  	Michigan	  		
97	  	Michael Auto Parts, Incorporated	  	Florida	  		
98	  	Mid-State Aftermarket Body Parts, Inc.	  	Arkansas	  		
99	  	Northern Light Refinishing Inc.	  	Michigan	  		
100	  	Pennsylvania Collision Parts LLC	  	Pennsylvania	  		

							
101	  	Pick-Your-Part Auto Wrecking	  	California	  		
102	  	Potomac German Auto, Inc.	  	Maryland	  		
103	  	Potomac German Auto South, Inc.	  	Florida	  		
104	  	Pull-N-Save Auto Parts, LLC	  	Colorado	  	LKQ Pull-N-Save Auto Parts of Aurora LLC	
105	  	Quality Body Parts, Inc.	  	Connecticut	  		
106	  	Redding Auto Center, Inc.	  	California	  	LKQ Auto Parts of Northern California	
107	  	Scrap Processors, LLC	  	Illinois	  		
108	  	Speedway Pull-N-Save Auto Parts, LLC	  	Florida	  	LKQ Self Service Auto Parts of Daytona, LLC	
109	  	Supreme Auto Parts, Inc.	  	Pennsylvania	  		
110	  	Transmetco Corporation	  	Indiana	  		
111	  	Transwheel Corporation	  	Indiana	  		
112	  	U-Pull-It, Inc.	  	Illinois	  		
113	  	U-Pull-It, North, LLC	  	Illinois	  		

Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-110149 and 333-128151 on Form S-8, Registration Statement No. 333-133910 on Form S-3, and Registration Statement No. 333-133911 on Form S-4 of our reports dated February 26, 2009, relating to the consolidated financial statements and financial statement schedule of LKQ Corporation and subsidiaries (which expressed an unqualified opinion and included an explanatory paragraph regarding the Company’s adoption in 2007 of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Ta x— an Interpretation of Financial Accounting Standards Board Statement No. 109 ) and the effectiveness of LKQ Corporation and subsidiaries’ internal controls over financial reporting, appearing in this Annual Report on Form 10-K of LKQ Corporation for the year ended December 31, 2008.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 26, 2009

EXHIBIT 31.1
CERTIFICATIONS
I, Joseph M. Holsten, certify that:
1. I have reviewed this annual report on Form 10-K of LKQ Corporation (the “Company”);
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
February 27, 2009

/s/ JOSEPH M. HOLSTEN	
Joseph M. Holsten	
President and Chief Executive Officer	

EXHIBIT 31.2
CERTIFICATIONS
I, Mark T. Spears, certify that:
1. I have reviewed this annual report on Form 10-K of LKQ Corporation (the “Company”);
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
February 27, 2009

/s/ MARK T. SPEARS	
Mark T. Spears	
Executive Vice President and Chief Financial Officer	

EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of LKQ Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, as President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: February 27, 2009	 		
	 	/s/ JOSEPH M. HOLSTEN	
	 	Joseph M. Holsten	
	 	President and Chief Executive Officer	

EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of LKQ Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, as Executive Vice President and Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: February 27, 2009	 		
	 	/s/ MARK T. SPEARS	
	 	Mark T. Spears 	
	 	Executive Vice President and Chief Financial Officer