LKQ CORP, 10-Q filed on 5/7/2018
Quarterly Report
v3.8.0.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2018
Apr. 27, 2018
Document and Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2018  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q1  
Trading Symbol LKQ  
Entity Registrant Name LKQ CORP  
Entity Central Index Key 0001065696  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Entity Common Stock, Shares Outstanding   309,710,577
v3.8.0.1
Unaudited Condensed Consolidated Statements of Income - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Income Statement [Abstract]    
Revenue $ 2,720,764 $ 2,342,843
Cost of goods sold 1,666,793 1,412,750
Gross margin 1,053,971 930,093
Selling, general and administrative expenses (1) 766,891 642,817
Restructuring and acquisition related expenses 4,054 2,928
Depreciation and amortization 56,458 48,656
Operating income 226,568 235,692
Other expense (income):    
Interest expense, net 28,515 23,988
Other income, net (2,882) (1,046)
Total other expense, net 25,633 22,942
Income from continuing operations before provision for income taxes 200,935 212,750
Provision for income taxes 49,584 72,155
Equity in earnings of unconsolidated subsidiaries 1,412 214
Income from continuing operations 152,763 140,809
Net loss from discontinued operations 0 (4,531)
Net income 152,763 136,278
Less: net loss attributable to noncontrolling interest (197)  
Net income attributable to LKQ stockholders $ 152,960 $ 136,278
Basic earnings per share: (2)    
Income from continuing operations $ 0.49 $ 0.46
Net loss from discontinued operations   (0.01)
Net income 0.49 0.44
Less: net loss attributable to noncontrolling interest (0.00)  
Net income attributable to LKQ stockholders 0.49 0.44
Diluted earnings per share: (1)    
Income from continuing operations 0.49 0.45
Net loss from discontinued operations   (0.01)
Net income 0.49 0.44
Less: net loss attributable to noncontrolling interest (0.00)  
Net income attributable to LKQ stockholders $ 0.49 $ 0.44
v3.8.0.1
Unaudited Condensed Consolidated Statements of Comprehensive Income - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Statement of Comprehensive Income [Abstract]    
Net income $ 152,763 $ 136,278
Less: net loss attributable to noncontrolling interest (197)  
Net income attributable to LKQ stockholders 152,960 136,278
Other comprehensive income (loss):    
Foreign currency translation, net of tax 48,485 21,579
Net change in unrealized gains/losses on cash flow hedges, net of tax 3,254 3,163
Net change in unrealized gains/losses on pension plans, net of tax (621) (3,041)
Net change in other comprehensive loss from unconsolidated subsidiaries (605) (162)
Other comprehensive income 50,513 21,539
Comprehensive income 203,276 157,817
Less: comprehensive loss attributable to noncontrolling interest (197)  
Comprehensive income attributable to LKQ stockholders $ 203,473 $ 157,817
v3.8.0.1
Unaudited Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 31, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 245,679 $ 279,766
Receivables, net 1,211,788 1,027,106
Inventories 2,401,309 2,380,783
Prepaid expenses and other current assets 180,367 134,479
Total current assets 4,039,143 3,822,134
Property, plant and equipment, net 929,756 913,089
Intangible assets:    
Goodwill 3,572,198 3,536,511
Other intangibles, net 740,804 743,769
Equity method investments 208,210 208,404
Other assets 146,067 142,965
Total assets 9,636,178 9,366,872
Current liabilities:    
Accounts payable 812,661 788,613
Accrued expenses:    
Accrued payroll-related liabilities 112,140 143,424
Other accrued expenses 267,364 218,600
Refund liability 99,179 0
Other current liabilities 41,167 45,727
Current portion of long-term obligations 142,277 126,360
Total current liabilities 1,474,788 1,322,724
Long-term obligations, excluding current portion 3,170,788 3,277,620
Deferred income taxes 242,226 252,359
Other noncurrent liabilities 329,395 307,516
Commitments and Contingencies
Stockholders’ equity:    
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 309,630,976 and 309,126,386 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively 3,096 3,091
Additional paid-in capital 1,146,391 1,141,451
Retained earnings 3,271,718 3,124,103
Accumulated other comprehensive loss (14,618) (70,476)
Total Company stockholders' equity 4,406,587 4,198,169
Noncontrolling interest 12,394 8,484
Total stockholders' equity 4,418,981 4,206,653
Total liabilities and stockholders’ equity $ 9,636,178 $ 9,366,872
v3.8.0.1
Unaudited Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares
Mar. 31, 2018
Dec. 31, 2017
Statement of Financial Position [Abstract]    
Common stock, par value $ 0.01 $ 0.01
Common stock, shares authorized 1,000,000,000 1,000,000,000
Common stock, shares issued 309,630,976 309,126,386
Common stock, shares outstanding 309,630,976 309,126,386
v3.8.0.1
Unaudited Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net income $ 152,763 $ 136,278
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 61,066 50,604
Stock-based compensation expense 5,982 7,285
Loss on sale of business   8,580
Other (3,134) 1,343
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:    
Receivables, net (130,520) (108,893)
Inventories 5,016 (745)
Prepaid income taxes/income taxes payable 37,362 61,064
Accounts payable 23,924 24,449
Other operating assets and liabilities (7,296) (7,672)
Net cash provided by operating activities 145,163 172,293
CASH FLOWS FROM INVESTING ACTIVITIES:    
Purchases of property, plant and equipment (62,189) (44,398)
Acquisitions, net of cash acquired (2,966) (77,056)
Proceeds from disposals of business/investment   301,297
Other investing activities, net 534 1,314
Net cash (used in) provided by investing activities (64,621) 181,157
CASH FLOWS FROM FINANCING ACTIVITIES:    
Proceeds from exercise of stock options 2,255 2,464
Taxes paid related to net share settlements of stock-based compensation awards (3,292) (3,644)
Debt issuance costs (724)  
Borrowings under revolving credit facilities 201,669 45,239
Repayments under revolving credit facilities (321,525) (389,313)
Repayments under term loans (4,405) (9,295)
Repayments under receivables securitization facility   (150)
Borrowings of Other Long-term Debt 4,409 23,313
Other financing activities, net 4,107 5,000
Net cash used in financing activities (117,506) (326,386)
Effect of exchange rate changes on cash and cash equivalents 2,877 3,034
Net (decrease) increase in cash and cash equivalents (34,087) 30,098
Cash and cash equivalents of continuing operations, beginning of period 279,766 227,400
Add: Cash and cash equivalents of discontinued operations, beginning of period 0 7,116
Cash and cash equivalents of continuing and discontinued operations, beginning of period 279,766 227,400
Cash and cash equivalents, end of period 245,679 264,614
Supplemental disclosure of cash paid for:    
Income taxes, net of refunds 15,464 13,746
Interest 13,975 10,965
Supplemental disclosure of noncash investing and financing activities:    
Noncash property, plant and equipment additions 4,199 2,936
Notes and other financing receivables in connection with disposals of business/investment   5,848
Continuing and Discontinued Operations    
CASH FLOWS FROM FINANCING ACTIVITIES:    
Cash and cash equivalents of continuing operations, beginning of period   234,516
Cash and cash equivalents of continuing and discontinued operations, beginning of period   234,516
Supplemental disclosure of noncash investing and financing activities:    
Business Acquisition Contingent Consideration And Liabilities At Fair Value $ 34 $ 10,969
v3.8.0.1
Unaudited Condensed Consolidated Statements of Stockholders' Equity - USD ($)
$ in Thousands
Total
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Noncontrolling Interest
Noncontrolling interest $ 8,484         $ 8,484
Beginning balance, shares at Dec. 31, 2017   309,127,000        
Beginning balance at Dec. 31, 2017 4,198,169 $ 3,091 $ 1,141,451 $ 3,124,103 $ (70,476)  
Beginning Balance at January 1, 2018 at Dec. 31, 2017 4,206,653          
Net income 152,960     152,960    
Less: net loss attributable to noncontrolling interest (197)          
Net income 152,763          
Other comprehensive income 50,513          
Vesting of restricted stock units, net of shares withheld for employee tax   300,000        
Vesting of restricted stock units, net of shares withheld for employee tax (2,396) $ 3 (2,399)      
Stock-based compensation expense $ 5,982   5,982      
Exercise of stock options 226,260 226,000        
Exercise of stock options, value $ 2,255 $ 2 2,253      
Shares withheld for net share settlements of stock option awards, shares   22,000        
Shares withheld for net share settlement of stock option awards, value (896)   (896)      
Adoption of ASU 2018-02 (see Note 4) 5,345     (5,345)    
Capital contributions from noncontrolling interest shareholder 4,107         4,107
Ending balance, shares at Mar. 31, 2018   309,631,000        
Ending balance at Mar. 31, 2018 4,406,587 $ 3,096 $ 1,146,391 $ 3,271,718 $ (14,618)  
Ending Balance at March 31, 2018 at Mar. 31, 2018 4,418,981          
Noncontrolling interest $ 12,394         $ 12,394
v3.8.0.1
Interim Financial Statements (Notes)
3 Months Ended
Mar. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Interim Financial Statements
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements represent the consolidation of LKQ Corporation, a Delaware corporation, and its subsidiaries. LKQ Corporation is a holding company and all operations are conducted by subsidiaries. When the terms "LKQ," "the Company," "we," "us," or "our" are used in this document, those terms refer to LKQ Corporation and its consolidated subsidiaries.
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to interim financial statements. Accordingly, certain information related to our significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted. These unaudited condensed consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normally recurring adjustments) necessary to fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Operating results for interim periods are not necessarily indicative of the results that can be expected for any subsequent interim period or for a full year. These interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 28, 2018 ("2017 Form 10-K").
v3.8.0.1
Business Combinations (Notes)
3 Months Ended
Mar. 31, 2018
Business Combinations [Abstract]  
Business Combinations
Business Combinations
During the three months ended March 31, 2018, we completed one acquisition of a wholesale business in North America. This acquisition was not material to our results of operations or financial position as of and for the three months ended March 31, 2018.
During the year ended December 31, 2017, we completed 26 acquisitions including 6 wholesale businesses in North America, 16 wholesale businesses in Europe and 4 Specialty businesses. Our acquisitions in Europe included the acquisition of four aftermarket parts distribution businesses in Belgium in July 2017. Our acquisitions in Specialty included the acquisition of the aftermarket business of Warn Industries, Inc. ("Warn"), a leading designer, manufacturer and marketer of high performance vehicle equipment and accessories, in November 2017.
Total acquisition date fair value of the consideration for our 2017 acquisitions was $542 million, composed of $510 million of cash paid (net of cash acquired), $6 million for the estimated value of contingent payments to former owners (with maximum potential payments totaling $19 million), $5 million of other purchase price obligations (non-interest bearing) and $20 million of notes payable. We typically fund our acquisitions using borrowings under our credit facilities or other financing arrangements. During the year ended December 31, 2017, we recorded $307 million of goodwill related to these acquisitions, of which we expect $21 million to be deductible for income tax purposes.
On December 10, 2017, we entered into an agreement to acquire Stahlgruber GmbH ("Stahlgruber"), a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories with operations in Germany, Austria, Czech Republic, Italy, Slovenia, and Croatia with further sales to Switzerland. This acquisition will expand LKQ's geographic presence in continental Europe and serve as an additional strategic hub for our European operations. In addition, we believe this acquisition will allow for continued improvement in procurement, logistics and infrastructure optimization. The enterprise value for the pending Stahlgruber acquisition is €1.5 billion, which will be financed with the proceeds from €1.0 billion of senior notes, the direct issuance to Stahlgruber's owner of 8,055,569 newly issued shares of LKQ common stock, and borrowings under our existing revolving credit facility. On May 3, 2018, the European Commission cleared the proposed acquisition for the entire European Union, except with respect to the wholesale automotive parts business in the Czech Republic. The acquisition of the Czech Republic wholesale business has been referred to the Czech competition authority for review. We anticipate that the closing of the transaction with respect to Stahlgruber's operations outside of the Czech Republic will occur during the second quarter of 2018. The Czech Republic wholesale business represents an immaterial portion of Stahlgruber's revenue and profitability.
Our acquisitions are 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 values at the dates of acquisition. The purchase price allocations for the acquisitions made during the three months ended March 31, 2018 and the last nine months of the year ended December 31, 2017 are preliminary as we are in the process of determining the following: 1) valuation amounts for certain receivables, inventories and fixed assets acquired; 2) valuation amounts for certain intangible assets acquired; 3) the acquisition date fair value of certain liabilities assumed; and 4) the final estimation of the tax basis of the entities acquired. We have recorded preliminary estimates for certain of the items noted above and will record adjustments, if any, to the preliminary amounts upon finalization of the valuations. During the first quarter of 2018, the measurement period adjustments recorded for acquisitions completed in prior periods were not material.
The purchase price allocations for the acquisitions completed during the year ended December 31, 2017 are as follows (in thousands):
 
Year Ended
 
December, 31, 2017
 
All
Acquisitions
 (1)
Receivables
$
73,782

Receivable reserves
(7,032
)
Inventories (2)
150,342

Prepaid expenses and other current assets
(295
)
Property, plant and equipment
41,039

Goodwill
314,817

Other intangibles
181,216

Other assets
3,257

Deferred income taxes
(65,087
)
Current liabilities assumed
(111,484
)
Debt assumed
(33,586
)
Other noncurrent liabilities assumed
(1,917
)
Contingent consideration liabilities
(6,234
)
Other purchase price obligations
(5,074
)
Notes issued
(20,187
)
Settlement of pre-existing balances
242

Gains on bargain purchases (3)
(3,870
)
Settlement of other purchase price obligations (non-interest bearing)
3,159

Cash used in acquisitions, net of cash acquired
$
513,088

(1)
The amounts recorded during the year ended December 31, 2017 include $6 million and $3 million of adjustments to reduce property, plant and equipment and other assets for Rhiag-Inter Auto Parts Italia S.p.A. (“Rhiag”) and Pittsburgh Glass Works LLC (“PGW”), respectively.
(2)
The amount for our 2017 acquisitions includes a $4 million step-up adjustment related to our Warn acquisition.
(3)
The amount recorded during the year ended December 31, 2017 includes a $2 million increase to the gain on bargain purchase recorded for our Andrew Page acquisition as a result of changes to our estimate of the fair value of the net assets acquired. The remainder of the gain on bargain purchase recorded during the year ended December 31, 2017 is an immaterial amount related to another acquisition in Europe completed in the second quarter of 2017.
The fair value of our intangible assets is based on a number of inputs including projections of future cash flows, assumed royalty rates and customer attrition rates, all of which are Level 3 inputs. The fair value of our property, plant and equipment is determined using inputs such as market comparables and current replacement or reproduction costs of the asset, adjusted for physical, functional and economic factors; these adjustments to arrive at fair value use unobservable inputs in which little or no market data exists, and therefore, these inputs are considered to be Level 3 inputs. See Note 12, "Fair Value Measurements" for further information regarding the tiers in the fair value hierarchy.
The primary objectives of our acquisitions made during 2017 were to create economic value for our stockholders by enhancing our position as a leading source for alternative collision and mechanical repair products and to expand into other product lines and businesses that may benefit from our operating strengths. Certain 2017 acquisitions were completed to enable us to align our distribution model in the Benelux region.
When we identify potential acquisitions, we attempt to target companies with a leading market presence, an experienced management team and workforce that provide a fit with our existing operations, and strong cash flows. For certain of our acquisitions, we have identified cost savings and synergies as a result of integrating the company with our existing business that provide additional value to the combined entity. In many cases, acquiring companies with these characteristics will result in purchase prices that include a significant amount of goodwill.
The following pro forma summary presents the effect of the businesses acquired during the three months ended March 31, 2018 as though the businesses had been acquired as of January 1, 2017, and the businesses acquired during the year ended December 31, 2017 as though they had been acquired as of January 1, 2016. The pro forma adjustments are based upon unaudited financial information of the acquired entities (in thousands, except per share data):
 
Three Months Ended
 
March 31,
 
2018
 
2017
Revenue, as reported
$
2,720,764

 
$
2,342,843

Revenue of purchased businesses for the period prior to acquisition:
 
 
 
All acquisitions
26

 
139,216

Pro forma revenue
$
2,720,790

 
$
2,482,059

 
 
 
 
Income from continuing operations, as reported
$
152,763

 
$
140,809

Income from continuing operations of purchased businesses for the period prior to acquisition, and pro forma purchase accounting adjustments:
 
 
 
All acquisitions
0

 
7,470

Acquisition related expenses, net of tax (1)
623

 
1,243

Pro forma income from continuing operations
$
153,386

 
$
149,522

 
 
 
 
Earnings per share from continuing operations, basic - as reported
$
0.49

 
$
0.46

Effect of purchased businesses for the period prior to acquisition:
 
 
 
All acquisitions
0.00

 
0.02

Acquisition related expenses, net of tax (1)
0.00

 
0.00

Pro forma earnings per share from continuing operations, basic (2) 
$
0.50

 
$
0.49

 
 
 
 
Earnings per share from continuing operations, diluted - as reported
$
0.49

 
$
0.45

Effect of purchased businesses for the period prior to acquisition:
 
 
 
All acquisitions
0.00

 
0.02

Acquisition related expenses, net of tax (1)
0.00

 
0.00

Pro forma earnings per share from continuing operations, diluted (2) 
$
0.49

 
$
0.48


(1)
Includes expenses related to acquisitions closed in the period and excludes expenses for acquisitions not yet completed.
(2)
The sum of the individual earnings per share amounts may not equal the total due to rounding.
Unaudited pro forma supplemental information is based upon accounting estimates and judgments that we believe are reasonable. The unaudited pro forma supplemental information includes the effect of purchase accounting adjustments, such as the adjustment of inventory acquired to fair value, adjustments to depreciation on acquired property, plant and equipment, adjustments to rent expense for above or below market leases, adjustments to amortization on acquired intangible assets, adjustments to interest expense, and the related tax effects. The pro forma impact of our acquisitions also reflects the elimination of acquisition related expenses, net of tax. Refer to Note 6, "Restructuring and Acquisition Related Expenses," for further information regarding our acquisition related expenses. These pro forma results are not necessarily indicative of what would have occurred if the acquisitions had been in effect for the periods presented or of future results.
v3.8.0.1
Discontinued Operations (Notes)
3 Months Ended
Mar. 31, 2018
Discontinued Operations [Abstract]  
Disposal Groups, Including Discontinued Operations, Disclosure [Text Block]
Discontinued Operations
On March 1, 2017, LKQ completed the sale of the glass manufacturing business of its PGW subsidiary to a subsidiary of Vitro S.A.B. de C.V. ("Vitro") for a sales price of $301 million, including cash received of $316 million, net of cash disposed of $15 million. Related to this transaction, the remaining portion of the Glass operating segment was combined with our Wholesale - North America operating segment, which is part of our North America reportable segment, in the first quarter of 2017. See Note 15, "Segment and Geographic Information" for further information regarding our segments.
In connection with the Stock and Asset Purchase Agreement, the Company and Vitro entered into a twelve-month Transition Services Agreement commencing on the transaction date with two six-month renewal periods, a three-year Purchase and Supply Agreement, and an Intellectual Property Agreement.
The following table summarizes the operating results of the Company’s discontinued operations related to the sale described above for the three months ended March 31, 2017, as presented in Net loss from discontinued operations on the Unaudited Condensed Consolidated Statements of Income (in thousands):
 
Three Months Ended
 
March 31, 2017
Revenue
$
111,130

Cost of goods sold
100,084

Selling, general and administrative expenses
8,369

Operating income
2,677

Interest and other income, net (1)
1,204

Income from discontinued operations before taxes
3,881

Provision for income taxes
3,598

Equity in loss of unconsolidated subsidiaries
(534
)
Loss from discontinued operations, net of tax
(251
)
Loss on sale of discontinued operations, net of tax (2)
(4,280
)
Net loss from discontinued operations
$
(4,531
)

(1) The Company elected to allocate interest expense to discontinued operations based on the expected debt to be repaid. Under this approach, allocated interest from January 1, 2017 through the date of sale was $2 million. This expense was offset by foreign currency gains.
(2) In the first quarter of 2017, upon closing of the sale and write-off of the net assets of the glass manufacturing business, we recorded a pre-tax loss on sale of $9 million, and a $4 million tax benefit. The incremental loss primarily reflects a $6 million payable for intercompany sales from the glass manufacturing business to the aftermarket automotive glass distribution business incurred prior to closing, which was paid by LKQ during the second quarter of 2017, and capital expenditures in 2017 that were not reimbursed by the buyer.
The glass manufacturing business had $4 million of operating cash outflows, $4 million of investing cash outflows mainly consisting of capital expenditures, and $15 million of financing cash inflows made up of parent financing for the period from January 1, 2017 through March 1, 2017.
Pursuant to the Purchase and Supply Agreement, our aftermarket automotive glass distribution business will source various products from Vitro's glass manufacturing business annually for a three-year period beginning on March 1, 2017. Between January 1, 2017 and the sale date of March 1, 2017, intercompany sales between the glass manufacturing business and the continuing aftermarket automotive glass distribution business of PGW, which were eliminated in consolidation, were $8 million. All purchases from Vitro, including those outside of the Purchase and Supply Agreement, for the three months ended March 31, 2018 and for the period between the sale date of March 1, 2017 and March 31, 2017, were $10 million and $4 million, respectively.
v3.8.0.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2018
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
Financial Statement Information
Allowance for Doubtful Accounts
We have a reserve for uncollectible accounts, which was approximately $63 million and $58 million at March 31, 2018 and December 31, 2017, respectively.
Inventories
Inventories consist of the following (in thousands):
 
March 31,
 
December 31,
 
2018
 
2017
Aftermarket and refurbished products
$
1,915,537

 
$
1,877,653

Salvage and remanufactured products
469,648

 
487,108

Manufactured products
16,124

 
16,022

Total inventories
$
2,401,309

 
$
2,380,783


    Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of March 31, 2018, manufactured products inventory was composed of $9 million of raw materials, $2 million of work in process, and $5 million of finished goods. As of December 31, 2017, manufactured products inventory was composed of $10 million of raw materials, $2 million of work in process, and $4 million of finished goods.
Property, Plant and Equipment
We record depreciation expense associated with our refurbishing, remanufacturing, manufacturing and furnace operations as well as our distribution centers in Cost of goods sold on the Unaudited Condensed Consolidated Statements of Income. All other depreciation expense is reported in Depreciation and amortization. Total depreciation expense for the three months ended March 31, 2018 and 2017 was $37 million and $27 million, respectively.
Intangible Assets
Intangible assets consist primarily of goodwill (the cost of purchased businesses in excess of the fair value of the identifiable net assets acquired) and other specifically identifiable intangible assets, such as trade names, trademarks, customer and supplier relationships, software and other technology related assets, and covenants not to compete.
The changes in the carrying amount of goodwill by reportable segment for the three months ended March 31, 2018 are as follows (in thousands):
 
North America
 
Europe
 
Specialty
 
Total
Balance as of January 1, 2018
$
1,709,354

 
$
1,414,898

 
$
412,259

 
$
3,536,511

Business acquisitions and adjustments to previously recorded goodwill
584

 
259

 
(4,977
)
 
(4,134
)
Exchange rate effects
(2,891
)
 
42,510

 
202

 
39,821

Balance as of March 31, 2018
$
1,707,047

 
$
1,457,667

 
$
407,484

 
$
3,572,198


The components of other intangibles, net are as follows (in thousands):
 
March 31, 2018
 
December 31, 2017
Intangible assets subject to amortization
$
658,704

 
$
664,969

Indefinite-lived intangible assets
 
 
 
Trademarks
81,300

 
78,800

Other indefinite-lived intangible assets
800

 

Total
$
740,804

 
$
743,769


The components of intangible assets subject to amortization are as follows (in thousands):
 
March 31, 2018
 
December 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Trade names and trademarks
$
333,802

 
$
(79,437
)
 
$
254,365

 
$
327,332

 
$
(75,095
)
 
$
252,237

Customer and supplier relationships
520,386

 
(185,417
)
 
334,969

 
510,113

 
(167,532
)
 
342,581

Software and other technology related assets
129,851

 
(65,070
)
 
64,781

 
124,049

 
(59,081
)
 
64,968

Covenants not to compete
13,920

 
(9,331
)
 
4,589

 
14,981

 
(9,798
)
 
5,183

Total
$
997,959

 
$
(339,255
)
 
$
658,704

 
$
976,475

 
$
(311,506
)
 
$
664,969



Our estimated useful lives for our finite-lived intangible assets are as follows:
 
Method of Amortization
 
Useful Life
Trade names and trademarks
Straight-line
 
4-30 years
Customer and supplier relationships
Accelerated
 
6-20 years
Software and other technology related assets
Straight-line
 
3-15 years
Covenants not to compete
Straight-line
 
2-5 years

Amortization expense for intangibles was $24 million and $23 million during the three months ended March 31, 2018 and 2017, respectively. Estimated amortization expense for each of the five years in the period ending December 31, 2022 is $75 million (for the remaining nine months of 2018), $85 million, $72 million, $60 million and $51 million, respectively.
Investments in Unconsolidated Subsidiaries
Our investment in unconsolidated subsidiaries was $208 million at both March 31, 2018 and December 31, 2017. On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen AB ("Mekonomen") from AxMeko AB, an affiliate of Axel Johnson AB, for an aggregate purchase price of $181 million. Headquartered in Stockholm, Sweden, Mekonomen is the leading independent car parts and service chain in the Nordic region of Europe, offering a range of products including spare parts and accessories for cars, and workshop services for consumers and businesses. We are accounting for our interest in Mekonomen using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over the investee. As of March 31, 2018, the book value of our investment in Mekonomen exceeded our share of the book value of Mekonomen's net assets by $125 million; this difference is primarily related to goodwill and the fair value of other intangible assets. We are recording our equity in the net earnings of Mekonomen on a one quarter lag. For the three months ended March 31, 2018 and 2017, we recorded equity in earnings totaling $2 million and $0.3 million, respectively, related to our investment in Mekonomen, which represents our share of the results for the three months ended December 31, 2017 and 2016, respectively, including adjustments to convert the results to GAAP and to recognize the impact of our purchase accounting adjustments. In May 2017, we received a cash dividend of $7 million (SEK 67 million) related to our investment in Mekonomen. The Level 1 fair value of our equity investment in the publicly traded Mekonomen common stock at March 31, 2018 was $163 million compared to a carrying value of $202 million. We evaluated our investment in Mekonomen for other-than-temporary impairment and concluded the decline in fair value was not other-than-temporary.
Warranty Reserve
Some of our salvage mechanical products are sold with a standard six month warranty against defects. Additionally, some of our remanufactured engines are sold with a standard three year warranty against defects. We also provide a limited lifetime warranty for certain of our aftermarket products. These assurance-type warranties are not considered a separate performance obligation and thus, no transaction price is allocated to it. We record the warranty costs in Cost of goods sold on our Unaudited Condensed Consolidated Statements of Income. Our warranty reserve is calculated using historical claim information to project future warranty claims activity and is recorded within Other accrued expenses and Other noncurrent liabilities on our Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments.
The changes in the warranty reserve are as follows (in thousands):
Balance as of December 31, 2017
$
23,151

Warranty expense
10,000

Warranty claims
(9,294
)
Balance as of March 31, 2018
$
23,857


Recent Accounting Pronouncements
Adoption of New Revenue Standard
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). This update outlines a new comprehensive revenue recognition model that supersedes most current revenue recognition guidance and requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB has issued several updates to ASU 2014-09, which collectively with ASU 2014-09, represent the FASB Accounting Standards Codification Topic 606 (“ASC 606”). On January 1, 2018, we adopted ASC 606 for all contracts using the modified retrospective method, which means the historical periods are presented under the previous revenue standards with the cumulative net income effect being adjusted through retained earnings.
Most of the changes resulting from our adoption of ASC 606 were changes in presentation within the Unaudited Condensed Consolidated Balance Sheets and the Unaudited Condensed Consolidated Statements of Income. Therefore, while we made adjustments to certain opening balances on our January 1, 2018 balance sheet, we made no adjustments to opening retained earnings. We expect the impact of the adoption of ASC 606 to be immaterial to our net income on an ongoing basis. See Note 5, "Revenue Recognition" for the required disclosures under ASC 606.
With the adoption of ASC 606, we reclassified certain amounts related to variable consideration. Under ASC 606, we are required to present a refund liability and a returns asset within the Unaudited Condensed Consolidated Balance Sheet, whereas in periods prior to adoption, we presented the estimated margin impact of expected returns as a contra-asset within accounts receivable. Additionally, under ASC 606, the changes in the refund liability are reported in revenue, and the changes in the returns assets are reported in Cost of goods sold in the Unaudited Condensed Consolidated Statements of Income. Prior to adoption, the change in the reserve for returns was generally reported as a net amount within revenue. As a result, the income statement presentation was adjusted concurrently with the balance sheet change beginning in 2018.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASC 606 was as follows (in thousands):
 
Balance as of December 31, 2017
 
Adjustments Due to ASC 606
 
Balance as of January 1, 2018
Balance Sheet
 
 
 
 
 
Assets
 
 
 
 
 
Accounts receivable
$
1,027,106

 
$
38,511

 
$
1,065,617

Prepaid expenses and other current assets
134,479

 
44,508

 
178,987

Liabilities
 
 
 
 
 
Refund liability

 
83,019

 
83,019


The impact of the adoption of ASC 606 on our Unaudited Condensed Consolidated Balance Sheet and Unaudited Condensed Consolidated Statement of Income as of and for the three months ended March 31, 2018 was as follows (in thousands):
 
Balance as of March 31, 2018
 
As Reported
 
Amounts Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Balance Sheet
 
 
 
 
 
Assets
 
 
 
 
 
Accounts receivable
$
1,211,788

 
$
1,165,618

 
$
46,170

Prepaid expenses and other current assets
180,367

 
127,358

 
53,009

Liabilities
 
 
 
 
 
Refund liability
99,179

 

 
99,179

 
For the three months ended March 31, 2018
 
As Reported
 
Amounts Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Income Statement
 
 
 
 
 
Revenue
$
2,720,764

 
$
2,728,712

 
$
(7,948
)
Cost of goods sold
1,666,793

 
1,674,173

 
(7,380
)
Selling, general and administrative expenses
766,891

 
767,459

 
(568
)
We have not included a table of the impact of the balance sheet adjustments on the Unaudited Condensed Consolidated Statement of Cash Flows as the adjustment will net to zero within the operating activities section of this statement.
Under ASC 606, we have elected not to adjust consideration for the effect of a significant financing component at contract inception if the period between the transfer of goods to the customer and payment received from the customer is one year or less. Generally, our payment terms are short term in nature, but in some instances we may offer extended terms to customers exceeding one year such that interest would be accrued with respect to those contracts. The interest that would be accrued related to these contracts is immaterial at March 31, 2018.
Under ASC 340, "Other Assets and Deferred Costs," we have elected to recognize incremental costs of obtaining a contract (commissions earned by our sales representatives on product sales) as an expense when incurred, as we believe the amortization period of the asset would be one year or less due to the short-term nature of our contracts.
Other Recently Adopted Accounting Pronouncements
During the first quarter of 2018, we adopted ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), which changes how entities will recognize, measure, present and make disclosures about certain financial assets and financial liabilities. The adoption of ASU 2016-01 did not have a significant impact on our financial position, results of operations, cash flows or disclosures.
During the first quarter of 2018, we adopted ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"), which includes guidance on classification for the following items: debt prepayment or debt extinguishment costs, settlement of zero coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and corporate-owned or bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and other separately identifiable cash flows where application of the predominance principle is prescribed. No adjustments were required in our Unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2018. Within our Unaudited Condensed Consolidating Statements of Cash Flows in Note 16, "Condensed Consolidating Financial Information," we now present a new line item, Payments of deferred purchase price on receivables securitization, as a result of adopting ASU 2016-15; prior year cash flow information within this footnote has been recast to reflect the impact of adopting this accounting standard. Other than the addition of this new line item, there was no impact to our Unaudited Condensed Consolidating Statements of Cash Flows.
During the first quarter of 2018, we adopted ASU No. 2017-01 "Clarifying the Definition of a Business" (“ASU 2017-01”), which requires an evaluation of whether substantially all of the fair value of assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If so, the transaction does not qualify as a business. The guidance also requires an acquired business to include at least one substantive process and narrows the definition of outputs.  The adoption of ASU 2017-01 did not have a material impact on our unaudited condensed consolidated financial statements.
During the first quarter of 2018, we adopted ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the reduction of the U.S. federal statutory income tax rate to 21% from 35% due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). In addition, under ASU 2018-02, an entity is required to provide certain disclosures regarding stranded tax effects. ASU 2018-02 is effective for fiscal years and interim periods beginning after December 15, 2018; early adoption is permitted. As a result of the adoption of ASU 2018-02, we recorded a $5 million reclassification to increase Accumulated Other Comprehensive (Loss) Income and decrease Retained Earnings.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, "Leases" ("ASU 2016-02"), to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between current GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under current GAAP. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The standard requires that entities apply the effects of these changes using a modified retrospective approach, which includes a number of optional practical expedients. While we are still in the process of quantifying the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements and related disclosures, we anticipate the adoption will materially affect our consolidated balance sheet and disclosures, as the majority of our operating leases will be recorded on the balance sheet under ASU 2016-02. While we do not anticipate the adoption of this accounting standard to have a material impact on our consolidated statements of income at this time, this conclusion may change as we finalize our assessment. In order to assist in our timely implementation of the new standard, we have purchased new software to track our leases. We have engaged a third party to assist with the implementation of the new software with an expectation to complete the implementation by the end of 2018.
In August 2017, the FASB issued ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"), which amends the hedge accounting recognition and presentation requirements in ASC 815 ("Derivatives and Hedging"). ASU 2017-12 significantly alters the hedge accounting model by making it easier for an entity to achieve and maintain hedge accounting and provides for accounting that better reflects an entity's risk management activities. ASU 2017-12 is effective for fiscal years and interim periods beginning after December 15, 2018; early adoption is permitted. Entities will adopt the provisions of ASU 2017-12 by applying a modified retrospective approach to existing hedging relationships as of the adoption date. At this time, we are still evaluating the impact of this standard on our financial statements.
v3.8.0.1
Revenue Recognition Revenue Reconition (Notes)
3 Months Ended
Mar. 31, 2018
Revenue Recognition [Abstract]  
Revenue Recognition DIsclosure
Revenue Recognition
The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to achieve this core principle, which includes:
1.
Identifying contracts with customers,
2.
Identifying performance obligations within those contracts,
3.
Determining the transaction price,
4.
Allocating the transaction price to the performance obligation in the contract, which may include an estimate of variable consideration, and
5.
Recognizing revenue when or as each performance obligation is satisfied.
The majority of our revenue is derived from the sale of vehicle parts. Under both the previous revenue standards and ASC 606, we recognize revenue when the products are shipped to, delivered to or picked up by customers and title has transferred.
Sources of Revenue
We report our revenue in two categories: (i) parts and services and (ii) other. The following table sets forth our revenue by category, with our parts and services revenue further disaggregated by reportable segment (in thousands):
 
Three Months Ended
 
March 31,
 
2018
 
2017
North America
$
1,172,585

 
$
1,079,875

Europe
1,037,046

 
819,167

Specialty
350,674

 
313,899

Parts and services
2,560,305

 
2,212,941

Other
160,459

 
129,902

Total revenue
$
2,720,764

 
$
2,342,843


Parts and Services
Our parts revenue is generated from the sale of vehicle products including replacement parts, components and systems used in the repair and maintenance of vehicles and specialty products and accessories to improve the performance, functionality and appearance of vehicles. Services revenue includes additional services that are generally recorded concurrently with the related product sales, such as the sale of service-type warranties and fees for admission to our self service yards.
In North America, our vehicle replacement products include sheet metal collision parts such as doors, hoods, fenders; bumper covers; head and tail lamps; automotive glass products such as windshields; mirrors and grills; wheels; and large mechanical items such as engines and transmissions. In Europe, our products include a wide variety of small mechanical products such as brake pads, discs and sensors; clutches; electrical products such as spark plugs and batteries; steering and suspension products; filters; and oil and automotive fluids. In Specialty, we serve six product segments: truck and off-road; speed and performance; RV; towing; wheels, tires and performance handling; and miscellaneous accessories. 
Our service-type warranties typically have service periods ranging from 6 to 36 months. Under ASC 606, proceeds from these service-type warranties are deferred at contract inception and amortized on a straight-line basis to revenue over the contract period. The changes in deferred service-type warranty revenue are as follows (in thousands):
 
 
Balance January 1, 2018
$
19,465

Additional warranty revenue deferred
10,097

Warranty revenue recognized
(8,055
)
Balance March 31, 2018
$
21,507


Other Revenue
Revenue from other sources includes scrap sales, bulk sales to mechanical manufacturers (including cores) and sales of aluminum ingots and sows from our furnace operations. We derive scrap metal from several sources, including vehicles that have been used in both our wholesale and self service recycling operations and from OEMs and other entities that contract with us for secure disposal of "crush only" vehicles. The sale of hulks in our wholesale and self service recycling operations represents one performance obligation, and revenue is recognized based on a price per weight when the customer (processor) collects the scrap. Some adjustments may occur when the customer weighs the scrap at their location, and revenue is adjusted accordingly. We constrain our estimate of consideration to be received to the extent that we believe there will be a significant reversal in revenue.
Revenue by Geographic Area
See Note 15, "Segment and Geographic Information" for information related to our revenue by geographic region.
Variable Consideration
The amount of revenue ultimately received from the customer can vary due to variable consideration which includes returns, discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items. The previous revenue guidance required us to estimate the transaction price using a best estimate approach. Under ASC 606 we are required to select the “expected value method” or the “most likely amount” method in order to estimate variable consideration. We utilize both methods in practice depending on the type of variable consideration. In addition, our estimates of variable consideration are constrained to the extent that a significant reversal in revenue is expected. We recorded a refund liability and return asset for expected returns of $99 million and $53 million, respectively as of March 31, 2018 and a net reserve of $38 million as of December 31, 2017. The refund liability is presented separately on the balance sheet within liabilities while the return asset is presented within prepaid expenses and other current assets. Additionally, we recorded a reserve for our variable consideration of $44 million and $78 million as of March 31, 2018 and December 31, 2017, respectively. Variable consideration consists primarily of discounts, volume rebates, and other customer sales incentives which are recorded in Receivables, net on the Unaudited Condensed Consolidated Balance Sheets. While other customer incentive programs exist, we characterize them as material rights in the context of our sales transactions. We consider these programs to be immaterial to our consolidated financial statements.
v3.8.0.1
Restructuring and Acquisition Related Expenses
3 Months Ended
Mar. 31, 2018
Restructuring and Related Activities [Abstract]  
Restructuring and Acquisition Related Expenses
Restructuring and Acquisition Related Expenses
Acquisition Related Expenses
Acquisition related expenses, which include external costs such as legal, accounting and advisory fees, totaled $2 million and $3 million for the three months ended March 31, 2018 and 2017, respectively. Acquisition related expenses for the three months ended March 31, 2018 consisted of external costs for (i) completed acquisitions, (ii) pending acquisitions as of March 31, 2018, including $1 million related to Stahlgruber, and (iii) potential acquisitions that were terminated.
Acquisition related expenses for the three months ended March 31, 2017 consisted of $1 million of costs related to our acquisition of Andrew Page, with the remaining $2 million related to other completed acquisitions and acquisitions that were pending as of March 31, 2017.
Acquisition Integration Plans and Restructuring
During the three months ended March 31, 2018, we incurred $2 million of restructuring expenses. Expenses incurred during the three months ended March 31, 2018 were primarily related to the integration of our acquisition of Andrew Page. This integration included the closure of duplicate facilities and termination of employees.
During the three months ended March 31, 2017, we incurred less than $1 million of restructuring expenses, primarily related to the ongoing integration activities in our Specialty segment. Expenses incurred were primarily related to facility closure and the merger of existing facilities into larger distribution centers.
We expect to incur additional expenses related to the integration of certain of our acquisitions into our existing operations in 2018. These integration activities are expected to include the closure of duplicate facilities, rationalization of personnel in connection with the consolidation of overlapping facilities with our existing business, and moving expenses. Future expenses to complete these integration plans are expected to be less than $15 million.
v3.8.0.1
Equity Incentive Plans
3 Months Ended
Mar. 31, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Equity Incentive Plans
Stock-Based Compensation
In order to attract and retain employees, non-employee directors, consultants, and other persons associated with us, we may grant qualified and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares and performance units under the LKQ Corporation 1998 Equity Incentive Plan (the “Equity Incentive Plan”). We have granted RSUs, stock options, and restricted stock under the Equity Incentive Plan. We expect to issue new shares of common stock to cover past and future equity grants.
RSUs
RSUs vest over periods of up to five years, subject to a continued service condition. Currently outstanding RSUs contain either a time-based vesting condition or a combination of a performance-based vesting condition and a time-based vesting condition, in which case both conditions must be met before any RSUs vest. For most of the RSUs containing a performance-based vesting condition, the Company must report positive diluted earnings per share, subject to certain adjustments, during any fiscal year period within five years following the grant date; we have an immaterial amount of RSUs containing other performance-based vesting conditions. Each RSU converts into one share of LKQ common stock on the applicable vesting date. The grant date fair value of RSUs is based on the market price of LKQ stock on the grant date.
The fair value of RSUs that vested during the three months ended March 31, 2018 was $15 million.
The following table summarizes activity related to our RSUs under the Equity Incentive Plan for the three months ended March 31, 2018:
 
Number
Outstanding
 
Weighted
Average
Grant Date
Fair Value
 
Weighted Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
   (in thousands) (1)
Unvested as of January 1, 2018
1,624,390

 
$
29.94

 
 
 
 
Granted
562,380

 
$
43.35

 
 
 
 
Vested
(359,863
)
 
$
29.00

 
 
 
 
Forfeited / Canceled
(18,015
)
 
$
31.29

 
 
 
 
Unvested as of March 31, 2018
1,808,892

 
$
34.28

 
 
 
 
Expected to vest after March 31, 2018
1,630,647

 
$
34.26

 
3.0
 
$
61,883


(1) The aggregate intrinsic value of expected to vest RSUs represents the total pretax intrinsic value (the fair value of the Company's stock on the last day of each period multiplied by the number of units) that would have been received by the holders had all RSUs vested. This amount changes based on the market price of the Company’s common stock.
Stock Options
Stock options vest over periods of up to five years, subject to a continued service condition. Stock options expire either six or ten years from the date they are granted. No options were granted during the three months ended March 31, 2018. No options vested during the three months ended March 31, 2018; all of our outstanding options are fully vested.
The following table summarizes activity related to our stock options under the Equity Incentive Plan for the three months ended March 31, 2018:
 
Number
Outstanding
 
Weighted
Average Exercise Price
 
Weighted Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
   (in thousands) (1)
Balance as of January 1, 2018
1,738,073

 
$
9.20

 
 
 
 
Exercised
(226,260
)
 
$
9.97

 
 
 
$
7,123

Canceled
(509
)
 
$
32.31

 
 
 
 
Balance as of March 31, 2018
1,511,304

 
$
9.08

 
1.4
 
$
43,631

Exercisable as of March 31, 2018
1,511,304

 
$
9.08

 
1.4
 
$
43,631


(1) The aggregate intrinsic value of outstanding and exercisable options represents the total pretax intrinsic value (the difference between the fair value of the Company's stock on the last day of each period and the exercise price, multiplied by the number of options where the fair value exceeds the exercise price) that would have been received by the option holders had all option holders exercised their options as of the last day of the period indicated. This amount changes based on the market price of the Company’s common stock.
Stock-Based Compensation Expense
Total pre-tax stock-based compensation expense for RSUs totaled $6 million and $7 million for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, unrecognized compensation expense related to unvested RSUs is $51 million. Stock-based compensation expense related to these awards will be different to the extent that forfeitures are realized.
v3.8.0.1
Earnings Per Share
3 Months Ended
Mar. 31, 2018
Earnings Per Share [Abstract]  
Earnings Per Share
Earnings Per Share
The following chart sets forth the computation of earnings per share (in thousands, except per share amounts):
 
Three Months Ended
 
March 31,
 
2018
 
2017
Income from continuing operations
$
152,763

 
$
140,809

Denominator for basic earnings per share—Weighted-average shares outstanding
309,517

 
308,028

Effect of dilutive securities:
 
 
 
RSUs
619

 
564

Stock options
1,211

 
1,708

Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding
311,347

 
310,300

Basic earnings per share from continuing operations
$
0.49

 
$
0.46

Diluted earnings per share from continuing operations
$
0.49

 
$
0.45

The following table sets forth the number of employee stock-based compensation awards outstanding but not included in the computation of diluted earnings per share because their effect would have been antidilutive for the three months ended March 31, 2018 and 2017 (in thousands):
 
Three Months Ended
 
March 31,
 
2018
 
2017
Antidilutive securities:
 
 
 
RSUs

 
147

Stock options

 
78

v3.8.0.1
Accumulated Other Comprehensive Income (Loss)
3 Months Ended
Mar. 31, 2018
Equity [Abstract]  
Accumulated Other Comprehensive Income (Loss)
 
 
Three Months Ended
 
 
March 31, 2017
 
 
Foreign
Currency
Translation
 
Unrealized Gain
(Loss) on Cash Flow Hedges
 
Unrealized (Loss) Gain
on Pension Plans
 
Other Comprehensive Loss from Unconsolidated Subsidiaries
 
Accumulated
Other
Comprehensive
(Loss) Income
Beginning balance
 
$
(272,529
)
 
$
8,091

 
$
(2,737
)
 
$

 
$
(267,175
)
Pretax income
 
20,068

 
832

 
836

 

 
21,736

Income tax effect
 

 
(356
)
 
(318
)
 

 
(674
)
Reclassification of unrealized loss (gain)
 

 
4,257

 
(171
)
 

 
4,086

Reclassification of deferred income taxes
 

 
(1,570
)
 
48

 

 
(1,522
)
Disposal of business, net
 
1,511

 

 
(3,436
)
 

 
(1,925
)
Other comprehensive (loss) income from unconsolidated subsidiaries
 

 

 

 
(162
)
 
(162
)
Ending balance
 
$
(250,950
)
 
$
11,254

 
$
(5,778
)
 
$
(162
)
 
$
(245,636
)
The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands):
 
 
Three Months Ended
 
 
March 31, 2018
 
 
Foreign
Currency
Translation
 
Unrealized (Loss) Gain
on Cash Flow Hedges
 
Unrealized (Loss) Gain on Pension Plans
 
Other Comprehensive Loss from Unconsolidated Subsidiaries
 
Accumulated
Other
Comprehensive (Loss) Income
Beginning balance
 
$
(71,933
)
 
$
11,538

 
$
(8,772
)
 
$
(1,309
)
 
$
(70,476
)
Pretax income (loss)
 
48,435

 
(4,501
)
 
(629
)
 

 
43,305

Income tax effect
 
50

 
1,053

 
8

 

 
1,111

Reclassification of unrealized loss
 

 
8,747

 

 

 
8,747

Reclassification of deferred income taxes
 

 
(2,045
)
 

 

 
(2,045
)
Other comprehensive loss from unconsolidated subsidiaries
 

 

 

 
(605
)
 
(605
)
Adoption of ASU 2018-02
 
2,859

 
2,486

 

 

 
5,345

Ending balance
 
$
(20,589
)
 
$
17,278

 
$
(9,393
)
 
$
(1,914
)
 
$
(14,618
)
Accumulated Other Comprehensive Income (Loss)
The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands):
 
 
Three Months Ended
 
 
March 31, 2018
 
 
Foreign
Currency
Translation
 
Unrealized (Loss) Gain
on Cash Flow Hedges
 
Unrealized (Loss) Gain on Pension Plans
 
Other Comprehensive Loss from Unconsolidated Subsidiaries
 
Accumulated
Other
Comprehensive (Loss) Income
Beginning balance
 
$
(71,933
)
 
$
11,538

 
$
(8,772
)
 
$
(1,309
)
 
$
(70,476
)
Pretax income (loss)
 
48,435

 
(4,501
)
 
(629
)
 

 
43,305

Income tax effect
 
50

 
1,053

 
8

 

 
1,111

Reclassification of unrealized loss
 

 
8,747

 

 

 
8,747

Reclassification of deferred income taxes
 

 
(2,045
)
 

 

 
(2,045
)
Other comprehensive loss from unconsolidated subsidiaries
 

 

 

 
(605
)
 
(605
)
Adoption of ASU 2018-02
 
2,859

 
2,486

 

 

 
5,345

Ending balance
 
$
(20,589
)
 
$
17,278

 
$
(9,393
)
 
$
(1,914
)
 
$
(14,618
)


 
 
Three Months Ended
 
 
March 31, 2017
 
 
Foreign
Currency
Translation
 
Unrealized Gain
(Loss) on Cash Flow Hedges
 
Unrealized (Loss) Gain
on Pension Plans
 
Other Comprehensive Loss from Unconsolidated Subsidiaries
 
Accumulated
Other
Comprehensive
(Loss) Income
Beginning balance
 
$
(272,529
)
 
$
8,091

 
$
(2,737
)
 
$

 
$
(267,175
)
Pretax income
 
20,068

 
832

 
836

 

 
21,736

Income tax effect
 

 
(356
)
 
(318
)
 

 
(674
)
Reclassification of unrealized loss (gain)
 

 
4,257

 
(171
)
 

 
4,086

Reclassification of deferred income taxes
 

 
(1,570
)
 
48

 

 
(1,522
)
Disposal of business, net
 
1,511

 

 
(3,436
)
 

 
(1,925
)
Other comprehensive (loss) income from unconsolidated subsidiaries
 

 

 

 
(162
)
 
(162
)
Ending balance
 
$
(250,950
)
 
$
11,254

 
$
(5,778
)
 
$
(162
)
 
$
(245,636
)

Net unrealized gains on our interest rate swaps totaling $2 million and net unrealized losses of $1 million were reclassified to Interest expense, net in our Unaudited Condensed Consolidated Statements of Income during the three months ended March 31, 2018 and 2017, respectively. We also reclassified gains of $1 million and $2 million to Interest expense, net related to our cross currency swaps during the three months ended March 31, 2018 and 2017, respectively. Also related to our cross currency swaps, we reclassified losses of $12 million and $5 million to Other income, net in our Unaudited Condensed Consolidated Statements of Income during the three months ended March 31, 2018 and 2017, respectively; these gains and losses offset the impact of the remeasurement of the underlying contracts. The deferred income taxes related to our cash flow hedges were reclassified from Accumulated other comprehensive income (loss) to provision for income taxes.
As a result of the adoption of ASU 2018-02 in the first quarter of 2018, we recorded a $5 million reclassification to increase Accumulated Other Comprehensive (Loss) Income and decrease Retained Earnings. See Note 4, "Financial Statement Information" for further information regarding the adoption of ASU 2018-02.
v3.8.0.1
Long-Term Obligations
3 Months Ended
Mar. 31, 2018
Debt Disclosure [Abstract]  
Long-Term Obligations
Long-Term Obligations
Long-term obligations consist of the following (in thousands):
 
March 31,
 
December 31,
 
2018
 
2017
Senior secured credit agreement:
 
 
 
Term loans payable
$
700,395

 
$
704,800

Revolving credit facilities
1,172,140

 
1,283,551

U.S. Notes (2023)
600,000

 
600,000

Euro Notes (2024)
616,200

 
600,150

Receivables securitization facility
100,000

 
100,000

Notes payable through October 2025 at weighted average interest rates of 1.4% and 1.4%, respectively
29,413

 
29,146

Other long-term debt at weighted average interest rates of 1.9% and 1.7%, respectively
120,940

 
110,633

Total debt
3,339,088

 
3,428,280

Less: long-term debt issuance costs
(23,157
)
 
(21,476
)
Less: current debt issuance costs
(2,866
)
 
(2,824
)
Total debt, net of debt issuance costs
3,313,065

 
3,403,980

Less: current maturities, net of debt issuance costs
(142,277
)
 
(126,360
)
Long term debt, net of debt issuance costs
$
3,170,788

 
$
3,277,620





Senior Secured Credit Agreement
On December 1, 2017, LKQ Corporation, LKQ Delaware LLP, and certain other subsidiaries (collectively, the "Borrowers") entered into Amendment No. 2 to the Fourth Amended and Restated Credit Agreement ("Credit Agreement"), which amended the Fourth Amended and Restated Credit Agreement dated January 29, 2016 by modifying certain terms to (1) extend the maturity date by approximately two years to January 29, 2023; (2) increase the total availability under the revolving credit facility's multicurrency component from $2.45 billion to $2.75 billion; (3) increase the permitted net leverage ratio thresholds, including a temporary step-up in the allowable net leverage ratio in the case of permitted acquisitions; (4) modify the applicable margins and fees in the pricing grid; (5) increase the ability of LKQ and its subsidiaries to incur additional indebtedness; and (6) make other immaterial or clarifying modifications and amendments. The increase in the revolving credit facility's multicurrency component of $300 million will be used for general corporate purposes.
Amounts under the revolving credit facility are due and payable upon maturity of the Credit Agreement on January 29, 2023. Term loan borrowings, which totaled $700 million as of March 31, 2018, are due and payable in quarterly installments equal to $4 million on the last day of each fiscal quarter ending on or after March 31, 2018 and prior to March 31, 2019 and $9 million on the last day of each fiscal quarter ending on or after March 31, 2019, with the remaining balance due and payable on January 29, 2023.
We are required to prepay the term loan by amounts equal to proceeds from the sale or disposition of certain assets if the proceeds are not reinvested within twelve months. We also have the option to prepay outstanding amounts under the Credit Agreement without penalty.
The Credit Agreement contains customary representations and warranties and customary covenants that provide limitations and conditions on our ability to enter into certain transactions. The Credit Agreement also contains financial and affirmative covenants, including limitations on our net leverage ratio and a minimum interest coverage ratio.
Borrowings under the Credit Agreement bear interest at variable rates, which depend on the currency and duration of the borrowing elected, plus an applicable margin. The applicable margin is subject to change in increments of 0.25% depending on our net leverage ratio. Interest payments are due on the last day of the selected interest period or quarterly in arrears depending on the type of borrowing. Including the effect of the interest rate swap agreements described in Note 11, "Derivative Instruments and Hedging Activities," the weighted average interest rates on borrowings outstanding under the Credit Agreement at both March 31, 2018 and December 31, 2017 were 2.2%. We also pay a commitment fee based on the average daily unused amount of the revolving credit facilities. The commitment fee is subject to change in increments of 0.025% and 0.05% depending on our net leverage ratio. In addition, we pay a participation commission on outstanding letters of credit at an applicable rate based on our net leverage ratio, and a fronting fee of 0.125% to the issuing bank, which are due quarterly in arrears.
Of the total borrowings outstanding under the Credit Agreement, $22 million and $18 million were classified as current maturities at March 31, 2018 and December 31, 2017. As of March 31, 2018, there were letters of credit outstanding in the aggregate amount of $65 million. The amounts available under the revolving credit facilities are reduced by the amounts outstanding under letters of credit, and thus availability under the revolving credit facilities at March 31, 2018 was $1.5 billion.
Related to the execution of Amendment No. 2 to the Fourth Amended and Restated Credit Agreement in December 2017, we incurred $5 million of fees, the majority of which were capitalized as an offset to Long-Term Obligations and are amortized over the term of the agreement.
U.S. Notes (2023)
In 2013, we issued $600 million aggregate principal amount of 4.75% senior notes due 2023 (the "U.S. Notes (2023)"). The U.S. Notes (2023) are governed by the Indenture dated as of May 9, 2013 (the "U.S. Notes (2023) Indenture") among LKQ Corporation, certain of our subsidiaries (the "Guarantors") and U.S. Bank National Association, as trustee. The U.S. Notes (2023) are registered under the Securities Act of 1933.
The U.S. Notes (2023) bear interest at a rate of 4.75% per year from the most recent payment date on which interest has been paid or provided for. Interest on the U.S. Notes (2023) is payable in arrears on May 15 and November 15 of each year. The U.S. Notes (2023) are fully and unconditionally guaranteed, jointly and severally, by the Guarantors.
The U.S. Notes (2023) and the related guarantees are, respectively, LKQ Corporation's and each Guarantor's senior unsecured obligations and are subordinated to all of the Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the U.S. Notes (2023) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the U.S. Notes (2023) to the extent of the assets of those subsidiaries.
Euro Notes (2024)
On April 14, 2016, LKQ Italia Bondco S.p.A. (“LKQ Italia”), an indirect, wholly-owned subsidiary of LKQ Corporation, completed an offering of €500 million aggregate principal amount of senior notes due April 1, 2024 (the “Euro Notes (2024)”) in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering were used to repay a portion of the revolver borrowings under the Credit Agreement and to pay related fees and expenses. The Euro Notes (2024) are governed by the Indenture dated as of April 14, 2016 (the “Euro Notes (2024) Indenture”) among LKQ Italia, LKQ Corporation and certain of our subsidiaries (the “Euro Notes (2024) Subsidiaries”), the trustee, and the paying agent, transfer agent, and registrar.
The Euro Notes (2024) bear interest at a rate of 3.875% per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for. Interest on the Euro Notes (2024) is payable in arrears on April 1 and October 1 of each year. The Euro Notes (2024) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2024) Subsidiaries (the "Euro Notes (2024) Guarantors").
The Euro Notes (2024) and the related guarantees are, respectively, LKQ Italia’s and each Euro Notes (2024) Guarantor’s senior unsecured obligations and are subordinated to all of LKQ Italia's and the Euro Notes (2024) Guarantors’ existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2024) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2024) to the extent of the assets of those subsidiaries. The Euro Notes (2024) have been listed on the ExtraMOT, Professional Segment of the Borsa Italia S.p.A. securities exchange and the Global Exchange Market of the Irish Stock Exchange.
Euro Notes (2026/28) - Subsequent Event
On April 9, 2018, LKQ European Holdings B.V. ("LKQ Euro Holdings"), a wholly-owned subsidiary of LKQ Corporation, completed an offering of €1.0 billion aggregate principal amount of senior notes. The offering consisted of €750 million senior notes due 2026 (the "2026 notes") and €250 million senior notes due 2028 (the "2028 notes" and, together with the 2026 notes, the "Euro Notes (2026/28)") in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering, together with borrowings under our senior secured credit facility, will be used to (i) finance a portion of the consideration payable for the pending Stahlgruber acquisition, (ii) for general corporate purposes and (iii) to pay related fees and expenses, including the refinancing of net financial debt. The Euro Notes (2026/28) are governed by the Indenture dated as of April 9, 2018 (the “Euro Notes (2026/28) Indenture”) among LKQ Euro Holdings, the Company and certain of the Company’s subsidiaries (the “Euro Notes (2026/28) Subsidiaries”), the trustee, paying agent, transfer agent, and registrar.
The 2026 notes and 2028 notes bear interest at a rate of 3.625% and 4.125%, respectively, per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for. Interest on the Euro Notes (2026/28) is payable in arrears on April 1 and October 1 of each year, beginning on October 1, 2018. The Euro Notes (2026/28) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2026/28) Subsidiaries (the "Euro Notes (2026/28) Guarantors").
The Euro Notes (2026/28) and the related guarantees are, respectively, LKQ Euro Holdings' and each Euro Notes (2026/28) Guarantor’s senior unsecured obligations and will be subordinated to all of LKQ Euro Holdings' and the Euro Notes (2026/28) Guarantors’ existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2026/28) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2026/28) to the extent of the assets of those subsidiaries. We have agreed to use commercially reasonable efforts to cause the Euro Notes (2026/28) to be listed on the Global Exchange Market of Euronext Dublin as promptly as practicable after the issue date of the Euro Notes (2026/28) (and in any event prior to May 24, 2018, the 45th day following the issue date of the notes). In addition to other conventional redemption provisions, the Euro Notes (2026/28) are subject to a special mandatory redemption in the event that on or prior to October 6, 2018, (a) the Stahlgruber acquisition is not consummated or (b) the purchase and sale agreement governing the Stahlgruber acquisition is terminated. The special mandatory redemption price will be equal to 100% of the initial issue price of the notes, plus accrued and unpaid interest from the date of initial issuance (or, if after the October 1, 2018 interest payment date, from October 1, 2018) up to, but excluding, the special mandatory redemption date.
Receivables Securitization Facility
On November 29, 2016, we amended the terms of our receivables securitization facility with The Bank of Tokyo-Mitsubishi UFJ, LTD. ("BTMU") to: (i) extend the term of the facility to November 8, 2019; (ii) increase the maximum amount available to $100 million; and (iii) make other clarifying and updating changes. Under the facility, LKQ sells an ownership interest in certain receivables, related collections and security interests to BTMU for the benefit of conduit investors and/or financial institutions for cash proceeds. Upon payment of the receivables by customers, rather than remitting to BTMU the amounts collected, LKQ retains such collections as proceeds for the sale of new receivables generated by certain of the ongoing operations of the Company.
The sale of the ownership interest in the receivables is accounted for as a secured borrowing in our Consolidated Balance Sheets, under which the receivables included in the program collateralize the amounts invested by BTMU, the conduit investors and/or financial institutions (the "Purchasers"). The receivables are held by LKQ Receivables Finance Company, LLC ("LRFC"), a wholly owned bankruptcy-remote special purpose subsidiary of LKQ, and therefore, the receivables are available first to satisfy the creditors of LRFC, including the Purchasers. As of both March 31, 2018 and December 31, 2017, $144 million of net receivables were collateral for the investment under the receivables facility.
Under the receivables facility, we pay variable interest rates plus a margin on the outstanding amounts invested by the Purchasers. The variable rates are based on (i) commercial paper rates, (ii) the London InterBank Offered Rate ("LIBOR"), or (iii) base rates, and are payable monthly in arrears. The commercial paper rate is the applicable variable rate unless conduit investors are not available to invest in the receivables at commercial paper rates. In such case, financial institutions will invest at the LIBOR rate or at base rates. We also pay a commitment fee on the excess of the investment maximum over the average daily outstanding investment, payable monthly in arrears. As of March 31, 2018, the interest rate under the receivables facility was based on commercial paper rates and was 2.7%. The outstanding balances of $100 million as of both March 31, 2018 and December 31, 2017, were classified as long-term on the Unaudited Condensed Consolidated Balance Sheets because we have the ability and intent to refinance these borrowings on a long-term basis.
v3.8.0.1
Derivative Instruments and Hedging Activities
3 Months Ended
Mar. 31, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities
Derivative Instruments and Hedging Activities
We are exposed to market risks, including the effect of changes in interest rates, foreign currency exchange rates and commodity prices. Under our current policies, we use derivatives to manage our exposure to variable interest rates on our senior secured debt and changing foreign exchange rates for certain foreign currency denominated transactions. We do not hold or issue derivatives for trading purposes.
Cash Flow Hedges
We hold interest rate swap agreements to hedge a portion of the variable interest rate risk on our variable rate borrowings under our Credit Agreement, with the objective of minimizing the impact of interest rate fluctuations and stabilizing cash flows. Under the terms of the interest rate swap agreements, we pay the fixed interest rate and receive payment at a variable rate of interest based on LIBOR for the respective currency of each interest rate swap agreement’s notional amount. The effective portion of changes in the fair value of the interest rate swap agreements is recorded in Accumulated Other Comprehensive Income (Loss) and is reclassified to interest expense when the underlying interest payment has an impact on earnings. The ineffective portion of changes in the fair value of the interest rate swap agreements is reported in interest expense. Our interest rate swap contracts have maturity dates ranging from January to June 2021. As of March 31, 2018, we held interest rate swap contracts representing $590 million of U.S. dollar-denominated debt.
From time to time, we may hold foreign currency forward contracts related to certain foreign currency denominated intercompany transactions, with the objective of minimizing the impact of fluctuating exchange rates on these future cash flows. Under the terms of the foreign currency forward contracts, we will sell the foreign currency in exchange for U.S. dollars at a fixed rate on the maturity dates of the contracts. The effective portion of the changes in fair value of the foreign currency forward contracts is recorded in Accumulated Other Comprehensive Income (Loss) and reclassified to other income, net when the underlying transaction has an impact on earnings.
In 2016, we entered into three cross currency swap agreements for a total notional amount of $422 million (€400 million). The notional amount steps down by €15 million annually through 2020 with the remainder maturing in January 2021. These cross currency swaps contain an interest rate swap component and a foreign currency forward contract component that, combined with related intercompany financing arrangements, effectively convert variable rate U.S. dollar-denominated borrowings into fixed rate euro-denominated borrowings. The swaps are intended to minimize the impact of fluctuating exchange rates and interest rates on the cash flows resulting from the related intercompany financing arrangements. The effective portion of the changes in the fair value of the derivative instruments is recorded in Accumulated Other Comprehensive Income (Loss) and is reclassified to interest expense, net when the underlying transactions have an impact on earnings.
The following table summarizes the notional amounts and fair values of our designated cash flow hedges as of March 31, 2018 and December 31, 2017 (in thousands):
 
 
Notional Amount
 
Fair Value at March 31, 2018 (USD)
 
Fair Value at December 31, 2017 (USD)
 
 
March 31, 2018
 
December 31, 2017
 
Other Assets
 
Other Noncurrent Liabilities
 
Other Assets
 
Other Noncurrent Liabilities
Interest rate swap agreements
 
 
 
 
 
 
 
 
USD denominated
 
$
590,000

 
$
590,000

 
$
24,253

 
$

 
$
19,102

 
$

Cross currency swap agreements
 
 
 
 
 
 
 
 
USD/euro
 
$
402,580

 
$
406,546

 
9,208

 
77,812

 
5,504

 
61,492

Total cash flow hedges
 
$
33,461

 
$
77,812

 
$
24,606

 
$
61,492


While certain derivative instruments executed with the same counterparty are subject to master netting arrangements, we present our cash flow hedge derivative instruments on a gross basis in our Unaudited Condensed Consolidated Balance Sheets. The impact of netting the fair values of these contracts would result in a decrease to Other Assets and Other Noncurrent Liabilities on our Unaudited Condensed Consolidated Balance Sheets of $17 million and $12 million at March 31, 2018 and December 31, 2017, respectively.
The activity related to our cash flow hedges is included in Note 9, "Accumulated Other Comprehensive Income (Loss)." Ineffectiveness related to our cash flow hedges was immaterial to our results of operations during the three months ended March 31, 2018 and 2017. We do not expect future ineffectiveness related to our cash flow hedges to have a material effect on our results of operations.
As of March 31, 2018, we estimate that less than $1 million of derivative gains (net of tax) included in Accumulated Other Comprehensive Income (Loss) will be reclassified into our Unaudited Condensed Consolidated Statements of Income within the next 12 months.
Other Derivative Instruments
We hold other short-term derivative instruments, including foreign currency forward contracts to manage our exposure to variability related to inventory purchases and intercompany financing transactions denominated in a non-functional currency. We have elected not to apply hedge accounting for these transactions, and therefore the contracts are adjusted to fair value through our results of operations as of each balance sheet date, which could result in volatility in our earnings. The notional amount and fair value of these contracts at March 31, 2018 and December 31, 2017, along with the effect on our results of operations during the three months ended March 31, 2018 and 2017, were immaterial.