LKQ CORP, 10-Q filed on 11/6/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2018
Oct. 24, 2018
Document and Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Sep. 30, 2018  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
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   318,202,654
v3.10.0.1
Unaudited Condensed Consolidated Statements of Income - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Income Statement [Abstract]        
Revenue $ 3,122,378 $ 2,465,800 $ 8,873,893 $ 7,267,054
Cost of goods sold 1,925,180 1,508,924 5,460,845 4,415,076
Gross margin 1,197,198 956,876 3,413,048 2,851,978
Selling, general and administrative expenses (1) 879,150 695,978 [1] 2,472,085 [1] 2,003,065 [1]
Restructuring and acquisition related expenses 6,614 4,922 26,546 10,371
Depreciation and amortization 76,701 56,877 196,322 159,178
Operating income 234,733 199,099 718,095 679,364
Other expense (income):        
Interest expense, net 40,860 25,222 107,647 73,806
Gains on bargain purchases   (913) (328) (3,990)
Other income, net (6,959) (3,107) (9,086) (6,884)
Total other expense, net 33,901 21,202 98,233 62,932
Income from continuing operations before provision for income taxes 200,832 177,897 619,862 616,432
Provision for income taxes 46,068 58,189 156,427 206,206
Equity in (losses) earnings of unconsolidated subsidiaries (20,284) 2,673 (18,326) 3,878
Income from continuing operations 134,480 122,381 445,109 414,104
Net loss from discontinued operations       (4,531)
Net income 134,480 122,381 445,109 409,573
Less: net income attributable to noncontrolling interest 378   1,040  
Net income attributable to LKQ stockholders $ 134,102 $ 122,381 $ 444,069 $ 409,573
Basic earnings per share: (2)        
Income from continuing operations $ 0.42 $ 0.40 $ 1.42 $ 1.34
Net loss from discontinued operations       (0.01)
Net income 0.42 0.40 1.42 1.33
Less: net income attributable to noncontrolling interest 0.00   0.00  
Net income attributable to LKQ stockholders [2] 0.42 0.40 1.42 1.33
Diluted earnings per share: (2)        
Income from continuing operations 0.42 0.39 1.41 1.33
Net loss from discontinued operations       (0.01)
Net income 0.42 0.39 1.41 1.32
Net income attributable to Noncontrolling Interest Per Share, Diluted 0.00   0.00  
Net income attributable to LKQ stockholders [2] $ 0.42 $ 0.39 $ 1.41 $ 1.32
[1] (1) Selling, general and administrative expenses contain facility and warehouses expenses and distribution expenses that were previously shown separately.
[2] (2) The sum of the individual earnings per share amounts may not equal the total due to rounding.
v3.10.0.1
Unaudited Condensed Consolidated Statements of Comprehensive Income - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Statement of Comprehensive Income [Abstract]        
Net income $ 134,480 $ 122,381 $ 445,109 $ 409,573
Less: net income attributable to noncontrolling interest 378   1,040  
Net income attributable to LKQ stockholders 134,102 122,381 444,069 409,573
Other comprehensive income (loss):        
Foreign currency translation, net of tax (20,951) 59,618 (77,630) 174,794
Net change in unrealized gains/losses on cash flow hedges, net of tax 304 (1,776) 5,964 457
Net change in unrealized gains/losses on pension plans, net of tax (1,274) (150) 154 4,053
Net change in other comprehensive income (loss) from unconsolidated subsidiaries 643 (1,034) 2,160 (1,635)
Other comprehensive (loss) income (18,730) 56,658 (69,660) 169,563
Comprehensive income 115,750 179,039 375,449 579,136
Less: comprehensive income attributable to noncontrolling interest 378   1,040  
Comprehensive income attributable to LKQ stockholders $ 115,372 $ 179,039 $ 374,409 $ 579,136
v3.10.0.1
Unaudited Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Sep. 30, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 341,346 $ 279,766
Receivables, net 1,255,876 1,027,106
Inventories 2,794,894 2,380,783
Prepaid expenses and other current assets 200,944 134,479
Total current assets 4,593,060 3,822,134
Property, plant and equipment, net 1,201,003 913,089
Intangible assets:    
Goodwill 4,475,266 3,536,511
Other intangibles, net 953,372 743,769
Equity method investments 157,409 208,404
Other assets 205,226 142,965
Total assets 11,585,336 9,366,872
Current liabilities:    
Accounts payable 941,747 788,613
Accrued expenses:    
Accrued payroll-related liabilities 153,536 143,424
Other accrued expenses 358,212 218,600
Refund liability 106,732  
Other current liabilities 57,088 45,727
Current portion of long-term obligations 118,365 126,360
Total current liabilities 1,735,680 1,322,724
Long-term obligations, excluding current portion 4,250,137 3,277,620
Deferred income taxes 325,537 252,359
Other noncurrent liabilities 376,566 307,516
Commitments and contingencies
Stockholders’ equity:    
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 318,197,309 and 309,126,386 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively 3,182 3,091
Additional paid-in capital 1,409,242 1,141,451
Retained earnings 3,562,827 3,124,103
Accumulated other comprehensive loss (134,791) (70,476)
Total Company stockholders' equity 4,840,460 4,198,169
Noncontrolling interest 56,956 8,484
Total stockholders' equity 4,897,416 4,206,653
Total liabilities and stockholders’ equity $ 11,585,336 $ 9,366,872
v3.10.0.1
Unaudited Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares
Sep. 30, 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 318,197,309 309,126,386
Common stock, shares outstanding 318,197,309 309,126,386
v3.10.0.1
Unaudited Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net income $ 445,109 $ 409,573
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 210,977 166,508
Impairment on Mekonomen equity method investment 22,715  
Stock-based compensation expense 17,544 17,582
Loss on sale of business   8,580
Other (7,187) (11,982)
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:    
Receivables, net (70,797) (75,444)
Inventories (71,058) (97,584)
Prepaid income taxes/income taxes payable 7,262 (928)
Accounts payable (71,997) 42,175
Other operating assets and liabilities 38,599 (9,237)
Net cash provided by operating activities 521,167 449,243
CASH FLOWS FROM INVESTING ACTIVITIES:    
Purchases of property, plant and equipment (171,763) (135,537)
Acquisitions, net of cash acquired (1,206,067) (252,667)
Proceeds from disposals of business/investment 0 301,297
Investments in unconsolidated subsidiaries (11,066) (7,114)
Receipts of deferred purchase price on receivables under factoring arrangements 9,410 0
Other investing activities, net 7,970 9,864
Net cash used in investing activities (1,371,516) (84,157)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Proceeds from exercise of stock options 3,772 6,465
Taxes paid related to net share settlements of stock-based compensation awards (4,768) (5,095)
Debt issuance costs (16,938)  
Proceeds from issuance of Euro Notes (2026/28) 1,232,100  
Borrowings under revolving credit facilities 1,025,496 424,976
Repayments under revolving credit facilities (1,110,035) (770,884)
Repayments under term loans (114,800) (27,884)
Borrowings under receivables securitization facility   8,525
Repayments under receivables securitization facility   (9,925)
(Repayments) borrowings of other debt, net (38,695) 24,522
Payments of other obligations   (2,079)
Other financing activities, net 3,182 4,316
Net cash provided by (used in) financing activities 979,314 (347,063)
Effect of exchange rate changes on cash and cash equivalents (67,385) 22,538
Net increase in cash and cash equivalents 61,580 40,561
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   7,116
Cash and cash equivalents of continuing and discontinued operations, beginning of period 279,766 234,516
Cash and cash equivalents, end of period 341,346 275,077
Supplemental disclosure of cash paid for:    
Income taxes, net of refunds 158,740 218,332
Interest 74,417 57,519
Supplemental disclosure of noncash investing and financing activities:    
Stock issued in acquisitions 251,334  
Contingent consideration liabilities 3,107 6,234
Notes payable and other financing obligations, including notes issued and debt assumed in connection with business acquisitions/investment 82,664 52,576
Noncash property, plant and equipment additions $ 11,010 4,918
Notes and other financing receivables in connection with disposals of business/investment   $ 5,848
v3.10.0.1
Unaudited Condensed Consolidated Statements of Stockholders' Equity - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Noncontrolling Interest
July 1, 2018 at Dec. 31, 2016   307,545        
July 1, 2018 at Dec. 31, 2016 $ 3,442,949 $ 3,075 $ 1,116,690 $ 2,590,359 $ (267,175)  
Net income 409,573          
Net income attributable to LKQ stockholders 409,573     409,573    
Other comprehensive income 169,563       169,563  
Vesting of restricted stock units, net of shares withheld for employee tax   736        
Vesting of restricted stock units, net of shares withheld for employee tax (3,895) $ 7 (3,902)      
Stock-based compensation expense 17,582   17,582      
Exercise of stock options   772        
Exercise of stock options 6,465 $ 8 6,457      
Shares withheld for net share settlement of stock option awards   (35)        
Shares withheld for net share settlement of stock option awards (1,200)   (1,200)      
September 30, 2018 at Sep. 30, 2017   309,018        
September 30, 2018 at Sep. 30, 2017 4,041,037 $ 3,090 1,135,627 2,999,932 (97,612)  
July 1, 2018 at Jun. 30, 2017   308,621        
July 1, 2018 at Jun. 30, 2017 3,856,685 $ 3,086 1,130,318 2,877,551 (154,270)  
Net income 122,381          
Net income attributable to LKQ stockholders 122,381     122,381    
Other comprehensive income 56,658       56,658  
Vesting of restricted stock units, net of shares withheld for employee tax   259        
Vesting of restricted stock units, net of shares withheld for employee tax (1,140) $ 2 (1,142)      
Stock-based compensation expense 5,139   5,139      
Exercise of stock options   139        
Exercise of stock options 1,314 $ 2 1,312      
Shares withheld for net share settlement of stock option awards   (1)        
September 30, 2018 at Sep. 30, 2017   309,018        
September 30, 2018 at Sep. 30, 2017 4,041,037 $ 3,090 1,135,627 2,999,932 (97,612)  
Noncontrolling interest 8,484         $ 8,484
July 1, 2018 at Dec. 31, 2017   309,127        
July 1, 2018 at Dec. 31, 2017 4,206,653 $ 3,091 1,141,451 3,124,103 (70,476)  
Net income 445,109          
Less: net income attributable to noncontrolling interest 1,040         1,040
Net income attributable to LKQ stockholders 444,069     444,069    
Other comprehensive income (69,660)       (69,660)  
Stock issued in acquisitions   8,056        
Stock issued in acquisitions 251,334 $ 81 251,253      
Vesting of restricted stock units, net of shares withheld for employee tax   600        
Vesting of restricted stock units, net of shares withheld for employee tax (3,711) $ 6 (3,717)      
Stock-based compensation expense 17,544   17,544      
Exercise of stock options   441        
Exercise of stock options 3,772 $ 4 3,768      
Shares withheld for net share settlement of stock option awards   (27)        
Shares withheld for net share settlement of stock option awards (1,057)   (1,057)      
Adoption of ASU 2018-02 (see Note 4) 5,345     (5,345) 5,345  
Capital contributions from, net of dividends to, noncontrolling interest shareholder 3,182         3,182
Acquired noncontrolling interest 44,250         44,250
September 30, 2018 at Sep. 30, 2018   318,197        
September 30, 2018 at Sep. 30, 2018 4,897,416 $ 3,182 1,409,242 3,562,827 (134,791) 56,956
Noncontrolling interest           57,503
July 1, 2018 at Jun. 30, 2018   317,821        
July 1, 2018 at Jun. 30, 2018 4,776,975 $ 3,178 1,403,630 3,428,725 (116,061)  
Net income 134,480          
Less: net income attributable to noncontrolling interest 378         378
Net income attributable to LKQ stockholders 134,102     134,102    
Other comprehensive income (18,730)       (18,730)  
Vesting of restricted stock units, net of shares withheld for employee tax   256        
Vesting of restricted stock units, net of shares withheld for employee tax (934) $ 3 (937)      
Stock-based compensation expense 5,700   5,700      
Exercise of stock options   120        
Exercise of stock options 850 $ 1 849      
Capital contributions from, net of dividends to, noncontrolling interest shareholder (925)         (925)
September 30, 2018 at Sep. 30, 2018   318,197        
September 30, 2018 at Sep. 30, 2018 4,897,416 $ 3,182 $ 1,409,242 $ 3,562,827 $ (134,791) $ 56,956
Noncontrolling interest $ 56,956          
v3.10.0.1
Interim Financial Statements (Notes)
9 Months Ended
Sep. 30, 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").
v3.10.0.1
Business Combinations (Notes)
9 Months Ended
Sep. 30, 2018
Business Combinations [Abstract]  
Business Combinations
Business Combinations
On May 30, 2018, we acquired Stahlgruber GmbH ("Stahlgruber"), a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories with operations in Germany, Austria, Slovenia, Croatia, and with further sales to Switzerland. Total acquisition date fair value of the consideration for our Stahlgruber acquisition was €1.2 billion ($1.4 billion), composed of €1.0 billion ($1.1 billion) of cash paid (net of cash acquired), and €215 million ($251 million) of newly issued shares of LKQ common stock. We financed the acquisition with the proceeds from €1.0 billion ($1.2 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 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 Republic competition authority for review. The Czech Republic wholesale business represents an immaterial portion of Stahlgruber's revenue and profitability.
We recorded $929 million of goodwill related to our acquisition of Stahlgruber, of which we expect $292 million to be deductible for income tax purposes. In the period between the acquisition date and September 30, 2018, Stahlgruber, which is reported in our Europe reportable segment, generated revenue of $637 million and operating income of $34 million.
In addition to our acquisition of Stahlgruber, during the nine months ended September 30, 2018, we completed acquisitions of one wholesale business in North America and seven wholesale businesses in Europe. Total acquisition date fair value of the consideration for these acquisitions was $86 million, composed of $76 million of cash paid (net of cash acquired), $7 million of notes payable, and $3 million for the estimated value of contingent payments to former owners (with maximum potential payments totaling $5 million). During the nine months ended September 30, 2018, we recorded $72 million of goodwill related to these acquisitions, of which we expect an immaterial amount to be deductible for income tax purposes. In the period between the acquisition dates and September 30, 2018, these acquisitions generated revenue of $19 million and operating income of $2 million.
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 Specialty acquisitions 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.
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 nine months ended September 30, 2018 and the last three 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 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.
From the date of our preliminary allocation for Stahlgruber in the second quarter of 2018 through September 30, 2018, we recorded adjustments based on our valuation procedures, primarily related to inventory and current liabilities that resulted in the allocation of $1 million of goodwill to acquired net assets. From the date of our preliminary allocations for our other acquisitions completed in the first half of 2018, the measurement period adjustments recorded for acquisitions completed in prior periods were not material. The income statement effect of these measurement period adjustments for our Stahlgruber acquisition and our other acquisitions completed in the first half of 2018 that would have been recorded in previous reporting periods if the adjustments had been recognized as of the acquisition dates was immaterial. The balance sheet impact and income statement effect of other measurement-period adjustments recorded for acquisitions completed in prior periods were immaterial.
The purchase price allocations for the acquisitions completed during the nine months ended September 30, 2018 and the year ended December 31, 2017 are as follows (in thousands):
 
Nine Months Ended
 
Year Ended
 
September 30, 2018
 
December, 31, 2017
 
Stahlgruber
 
Other Acquisitions (2)
 
Total
 
All
Acquisitions
 (1)
Receivables
$
140,979

 
$
15,369

 
$
156,348

 
$
73,782

Receivable reserves
(2,818
)
 
(875
)
 
(3,693
)
 
(7,032
)
Inventories (3)
374,056

 
12,240

 
386,296

 
150,342

Prepaid expenses and other current assets
9,537

 
1,806

 
11,343

 
(295
)
Property, plant and equipment
260,661

 
6,089

 
266,750

 
41,039

Goodwill
929,376

 
68,254

 
997,630

 
314,817

Other intangibles
285,529

 
16,315

 
301,844

 
181,216

Other assets
16,625

 
37

 
16,662

 
3,257

Deferred income taxes
(97,805
)
 
(716
)
 
(98,521
)
 
(65,087
)
Current liabilities assumed
(343,221
)
 
(20,662
)
 
(363,883
)
 
(111,484
)
Debt assumed
(65,852
)
 
(4,410
)
 
(70,262
)
 
(33,586
)
Other noncurrent liabilities assumed (4)
(81,689
)
 
(9,993
)
 
(91,682
)
 
(1,917
)
Noncontrolling interest
(44,250
)
 

 
(44,250
)
 

Contingent consideration liabilities

 
(3,107
)
 
(3,107
)
 
(6,234
)
Other purchase price obligations
(2,349
)
 
3,853

 
1,504

 
(5,074
)
Stock issued
(251,334
)
 

 
(251,334
)
 

Notes issued

 
(6,948
)
 
(6,948
)
 
(20,187
)
Settlement of pre-existing balances

 

 

 
242

Gains on bargain purchases (5)

 
(328
)
 
(328
)
 
(3,870
)
Settlement of other purchase price obligations (non-interest bearing)

 
1,698

 
1,698

 
3,159

Cash used in acquisitions, net of cash acquired
$
1,127,445

 
$
78,622

 
$
1,206,067

 
$
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.r.l. (“Rhiag”) and Pittsburgh Glass Works LLC (“PGW”), respectively.
(2)
The amounts recorded during the nine months ended September 30, 2018 include a $5 million adjustment to increase other intangibles related to our Warn acquisition and $4 million of adjustments to reduce other purchase price obligations related to other 2017 acquisitions.
(3)
The amounts for our 2017 acquisitions include a $4 million step-up adjustment related to our Warn acquisition.
(4)
The amount recorded for our acquisition of Stahlgruber includes a $75 million liability for certain pension obligations. See Note 13, "Employee Benefit Plans" for information related to our defined benefit plans.
(5)
The amount recorded during the nine months ended September 30, 2018 is due to the gain on bargain purchase related to an acquisition in Europe completed in the second quarter of 2017 as a result of a change in the acquisition date fair value of the consideration. 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 Limited ("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 the previously mentioned 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 acquisition of Stahlgruber expands LKQ's geographic presence in continental Europe and serves as an additional strategic hub for our European operations. In addition, we believe the acquisition of Stahlgruber will allow for continued improvement in procurement, logistics and infrastructure optimization. The primary objectives of our other acquisitions made during the nine months ended September 30, 2018 and the year ended December 31, 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 provides 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 nine months ended September 30, 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Revenue, as reported
$
3,122,378

 
$
2,465,800

 
$
8,873,893

 
$
7,267,054

Revenue of purchased businesses for the period prior to acquisition:
 
 
 
 
 
 
 
Stahlgruber

 
473,326

 
815,405

 
1,289,083

Other acquisitions
6,641

 
83,893

 
51,132

 
387,844

Pro forma revenue
$
3,129,019

 
$
3,023,019

 
$
9,740,430

 
$
8,943,981

 
 
 
 
 
 
 
 
Income from continuing operations, as reported (1)
$
134,480

 
$
122,381

 
$
445,109

 
$
414,104

Income from continuing operations of purchased businesses for the period prior to acquisition, and pro forma purchase accounting adjustments:
 
 
 
 
 
 
 
Stahlgruber
5,054

 
6,061

 
14,114

 
5,298

Other acquisitions
161

 
3,478

 
1,588

 
17,014

Acquisition related expenses, net of tax (2)
681

 
2,301

 
13,986

 
5,010

Pro forma income from continuing operations
140,376

 
134,221

 
474,797

 
441,426

Less: Pro forma net income attributable to noncontrolling interest

 
888

 
2,799

 
2,157

Pro forma income from continuing operations attributable to LKQ stockholders
$
140,376

 
$
133,333

 
$
471,998

 
$
439,269

 
 
 
 
 
 
 
 
Earnings per share from continuing operations, basic - as reported
$
0.42

 
$
0.40

 
$
1.42

 
$
1.34

Effect of purchased businesses for the period prior to acquisition:
 
 
 
 
 
 
 
Stahlgruber
0.02

 
0.02

 
0.05

 
0.02

Other acquisitions
0.00

 
0.01

 
0.01

 
0.06

Acquisition related expenses, net of tax (2)
0.00

 
0.01

 
0.04

 
0.02

Impact of share issuance from acquisition of Stahlgruber

 
(0.01
)
 
(0.02
)
 
(0.03
)
Pro forma earnings per share from continuing operations, basic (3) 
0.44

 
0.42

 
1.49

 
1.39

Less: Pro forma net income attributable to noncontrolling interest

 
0.00

 
0.01

 
0.01

Pro forma income from continuing operations attributable to LKQ stockholders
$
0.44

 
$
0.42

 
$
1.49

 
$
1.39

 
 
 
 
 
 
 
 
Earnings per share from continuing operations, diluted - as reported
$
0.42

 
$
0.39

 
$
1.41

 
$
1.33

Effect of purchased businesses for the period prior to acquisition:
 
 
 
 
 
 
 
Stahlgruber
0.02

 
0.02

 
0.04

 
0.02

Other acquisitions
0.00

 
0.01

 
0.01

 
0.05

Acquisition related expenses, net of tax (2)
0.00

 
0.01

 
0.04

 
0.02

Impact of share issuance from acquisition of Stahlgruber

 
(0.01
)
 
(0.02
)
 
(0.03
)
Pro forma earnings per share from continuing operations, diluted (3) 
0.44

 
0.42

 
1.49

 
1.39

Less: Pro forma net income attributable to noncontrolling interest

 
0.00

 
0.01

 
0.01

Pro forma income from continuing operations attributable to LKQ stockholders
$
0.44

 
$
0.42

 
$
1.48

 
$
1.38


(1)
Includes interest expense for the period from April 9, 2018 through September 30, 2018 recorded on the senior notes issued in connection with our acquisition of Stahlgruber.
(2)
Includes expenses related to acquisitions closed in the period and excludes expenses for acquisitions not yet completed.
(3)
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. The pro forma information also includes the impact of the common stock issued to Stahlgruber as if it were issued on January 1, 2017. 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.
v3.10.0.1
Discontinued Operations (Notes)
9 Months Ended
Sep. 30, 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 16, "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 nine months ended September 30, 2017, as presented in Net loss from discontinued operations on the Unaudited Condensed Consolidated Statements of Income (in thousands):
 
Nine Months Ended
 
September 30, 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, were $4 million and $22 million for the three and nine months ended September 30, 2018, respectively, and were $10 million and $27 million for the three months ended September 30, 2017 and the period between the sale date of March 1, 2017 and September 30, 2017, respectively.
v3.10.0.1
Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2018
Accounting Policies [Abstract]  
Inventory
Inventories consist of the following (in thousands):
 
September 30,
 
December 31,
 
2018
 
2017
Aftermarket and refurbished products
$
2,287,776

 
$
1,877,653

Salvage and remanufactured products
484,761

 
487,108

Manufactured products
22,357

 
16,022

Total inventories
$
2,794,894

 
$
2,380,783


    Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of September 30, 2018, manufactured products inventory was composed of $16 million of raw materials, $2 million of work in process, and $4 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.
Our May 2018 acquisition of Stahlgruber contributed $374 million to our aftermarket and refurbished products inventory. See Note 2, "Business Combinations" for further information on our acquisitions.
Receivables, Policy [Policy Text Block]
We have a reserve for uncollectible accounts, which was approximately $63 million and $58 million at September 30, 2018 and December 31, 2017, respectively. Our May 2018 acquisition of Stahlgruber contributed $3 million to our reserve for uncollectible accounts. See Note 2, "Business Combinations" for further information on our acquisitions.
Recent Accounting Pronouncements
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 the prior 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 on 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 as of September 30, 2018 and our Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 was as follows (in thousands):
 
Balance as of September 30, 2018
 
As Reported
 
Amounts Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Balance Sheet
 
 
 
 
 
Assets
 
 
 
 
 
Accounts receivable
$
1,255,876

 
$
1,205,833

 
$
50,043

Prepaid expenses and other current assets
200,944

 
144,255

 
56,689

Liabilities
 
 
 
 
 
Refund liability
106,732

 

 
106,732

 
For the three months ended September 30, 2018
 
As Reported
 
Amounts Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Income Statement
 
 
 
 
 
Revenue
$
3,122,378

 
$
3,123,468

 
$
(1,090
)
Cost of goods sold
1,925,180

 
1,925,107

 
73

Selling, general and administrative expenses
879,150

 
880,313

 
(1,163
)
 
For the nine months ended September 30, 2018
 
As Reported
 
Amounts Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Income Statement
 
 
 
 
 
Revenue
$
8,873,893

 
$
8,882,558

 
$
(8,665
)
Cost of goods sold
5,460,845

 
5,467,061

 
(6,216
)
Selling, general and administrative expenses
2,472,085

 
2,474,534

 
(2,449
)

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 September 30, 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 upon adoption. Within our Unaudited Condensed Consolidating Statements of Cash Flows in Note 18, "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 upon adoption.
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.
During the first quarter of 2018, we adopted ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" ("ASU 2017-07"), which requires presentation of the current service cost component of net periodic benefit expense with other current compensation expenses for the related employees, and requires presentation of the remaining components of net periodic benefit expense, such as interest, expected return on plan assets, and amortization of actuarial gains and losses, outside of operating income. ASU 2017-07 also specifies that, on a prospective basis, only the service cost component is eligible for capitalization into inventory or other assets. While the income statement classification provisions of ASU 2017-07 are applicable on a retrospective basis, due to the immaterial impact to our Unaudited Condensed Consolidated Statements of Income in prior periods, we did not recast prior period income statement information and adopted the classification provisions on a prospective basis. The change in the capitalization provisions under ASU 2017-07 did not have a material impact on our unaudited condensed consolidated financial statements. See Note 13, "Employee Benefit Plans," for further disclosure on the components of net periodic benefit expense and classification of the components within our Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017.
During the third quarter of 2018, the FASB issued ASU No. 2018-15, "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" ("ASU 2018-15"). This update requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. ASU 2018-15 is effective for fiscal years and interim periods beginning after December 15, 2019; early adoption is permitted. We have adopted ASU 2018-15 in the third quarter of 2018 as we believe that our existing policy is consistent with the new guidance and thus no adjustments were required to be in compliance with this standard update.

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. During the second quarter, we completed phase one of the software roll-out for our North America and Specialty operations. We are nearing completion of the phase one roll-out in our Europe operations as of the filing date of this Quarterly Report on Form 10-Q.
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.
In August 2018, the FASB issued ASU No. 2018-13, "Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"), which removes, modifies, and adds certain disclosure requirements in ASC 820. ASU 2018-13 is effective for fiscal years and interim periods beginning after December 15, 2019; early adoption is permitted. We are in the process of evaluating the impact of this standard on our disclosures but do not believe that it will have a material impact.
In August 2018, the FASB issued ASU No. 2018-14, "Disclosure Framework- Changes to the Disclosure Requirements for Defined Benefit Plans" ("ASU 2018-14"), which removes, modifies, and adds certain disclosure requirements to ASC 715-20. ASU 2018-14 is effective for fiscal years and interim periods beginning after December 15, 2020; early adoption is permitted. We are in the process of evaluating the impact of this standard on our disclosures.
Financial Statement Information [Line Items]
Financial Statement Information
Allowance for Doubtful Accounts
We have a reserve for uncollectible accounts, which was approximately $63 million and $58 million at September 30, 2018 and December 31, 2017, respectively. Our May 2018 acquisition of Stahlgruber contributed $3 million to our reserve for uncollectible accounts. See Note 2, "Business Combinations" for further information on our acquisitions.
Inventories
Inventories consist of the following (in thousands):
 
September 30,
 
December 31,
 
2018
 
2017
Aftermarket and refurbished products
$
2,287,776

 
$
1,877,653

Salvage and remanufactured products
484,761

 
487,108

Manufactured products
22,357

 
16,022

Total inventories
$
2,794,894

 
$
2,380,783


    Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of September 30, 2018, manufactured products inventory was composed of $16 million of raw materials, $2 million of work in process, and $4 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.
Our May 2018 acquisition of Stahlgruber contributed $374 million to our aftermarket and refurbished products inventory. See Note 2, "Business Combinations" for further information on our acquisitions.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and improvements that extend the useful life of the related asset are capitalized. As property, plant and equipment are sold or retired, the applicable cost and accumulated depreciation are removed from the accounts and any resulting gain or loss thereon is recognized. Construction in progress consists primarily of building and land improvements at our existing facilities. Depreciation is calculated using the straight-line method over the estimated useful lives or, in the case of leasehold improvements, the term of the related lease and reasonably assured renewal periods, if shorter.
Our estimated useful lives are as follows:
Land improvements
10-20 years
Buildings and improvements
20-40 years
Machinery and equipment
3-20 years
Computer equipment and software
3-10 years
Vehicles and trailers
3-10 years
Furniture and fixtures
5-7 years
Property, plant and equipment consists of the following (in thousands):
 
September 30,
 
December 31,
 
2018
 
2017
Land and improvements
$
189,404

 
$
137,790

Buildings and improvements
373,607

 
233,078

Machinery and equipment
618,209

 
521,526

Computer equipment and software
142,719

 
133,753

Vehicles and trailers
177,778

 
161,269

Furniture and fixtures
52,595

 
31,794

Leasehold improvements
283,603

 
257,506

 
1,837,915

 
1,476,716

Less—Accumulated depreciation
(691,086
)
 
(606,112
)
Construction in progress
54,174

 
42,485

Total property, plant and equipment, net
$
1,201,003

 
$
913,089


    
The components of opening property, plant and equipment acquired as part of our acquisition of Stahlgruber in May 2018 are as follows (in thousands):
 
 
 
Gross Amount
Land and improvements
$
47,281

Buildings and improvements
125,649

Machinery and equipment
49,384

Computer equipment and software
3,760

Vehicles and trailers
643

Furniture and fixtures
28,535

Leasehold improvements
1,890

 
257,142

Construction in progress
3,519

Total property, plant and equipment
$
260,661



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 and nine months ended September 30, 2018 was $39 million and $115 million, respectively, and $34 million and $93 million during the three and nine months ended September 30, 2017, 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 nine months ended September 30, 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
1,073

 
1,002,277

 
(5,720
)
 
997,630

Exchange rate effects
(3,049
)
 
(55,901
)
 
75

 
(58,875
)
Balance as of September 30, 2018
$
1,707,378

 
$
2,361,274

 
$
406,614

 
$
4,475,266

During the nine months ended September 30, 2018, we recorded $929 million of goodwill related to our acquisition of Stahlgruber. See Note 2, "Business Combinations" for further information on our acquisitions.
The components of other intangibles, net are as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
Intangible assets subject to amortization
$
872,072

 
$
664,969

Indefinite-lived intangible assets
 
 
 
Trademarks
81,300

 
78,800

Total
$
953,372

 
$
743,769



The components of intangible assets subject to amortization are as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Trade names and trademarks
$
495,839

 
$
(88,805
)
 
$
407,034

 
$
327,332

 
$
(75,095
)
 
$
252,237

Customer and supplier relationships
586,221

 
(223,085
)
 
363,136

 
510,113

 
(167,532
)
 
342,581

Software and other technology related assets
172,391

 
(73,760
)
 
98,631

 
124,049

 
(59,081
)
 
64,968

Covenants not to compete
13,488

 
(10,217
)
 
3,271

 
14,981

 
(9,798
)
 
5,183

Total
$
1,267,939

 
$
(395,867
)
 
$
872,072

 
$
976,475

 
$
(311,506
)
 
$
664,969



The components of intangible assets acquired as part of our acquisitions in 2018 are as follows (in thousands):
 
Nine Months Ended
 
September 30, 2018
 
Stahlgruber
 
Other Acquisitions
 
Total
Trade names and trademarks
$
173,946

 
$
2,895

 
$
176,841

Customer and supplier relationships
78,239

 
8,194

 
86,433

Software and other technology related assets
33,344

 
92

 
33,436

Total
$
285,529

 
$
11,181

 
$
296,710


    
The weighted-average amortization periods for our intangible assets acquired during the nine months ended September 30, 2018 and the year ended December 31, 2017 are as follows (in years):
 
Nine Months Ended
 
Year Ended
 
September 30, 2018
 
December 31, 2017
 
Stahlgruber
 
Other Acquisitions
 
Total
 
All Acquisitions
Trade names and trademarks
19.9
 
20.0
 
19.9
 
11.2
Customer and supplier relationships
3.0
 
9.6
 
3.6
 
18.6
Software and other technology related assets
6.8
 
6.0
 
6.8
 
11.1
Covenants not to compete
-
 
-
 
-
 
4.4
Total acquired finite-lived intangible assets
13.7
 
12.2
 
13.7
 
16.5

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
 
3-20 years
Software and other technology related assets
Straight-line
 
3-15 years
Covenants not to compete
Straight-line
 
2-5 years

Amortization expense for intangibles was $42 million and $96 million during the three and nine months ended September 30, 2018, respectively, and $26 million and $74 million during the three and nine months ended September 30, 2017, respectively. Estimated amortization expense for each of the five years in the period ending December 31, 2022 is $40 million (for the remaining three months of 2018), $136 million, $104 million, $75 million and $62 million, respectively.
Investments in Unconsolidated Subsidiaries
Our investment in unconsolidated subsidiaries was $157 million and $208 million as of September 30, 2018 and December 31, 2017, respectively. On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen AB ("Mekonomen") 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. As a result of the investment, we nominated two representatives for election to Mekonomen's board of directors; both representatives were subsequently elected to and continue to serve on the board of directors, including one as the chairman of the board. 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 September 30, 2018, the book value of our investment in Mekonomen exceeded our share of the book value of Mekonomen's net assets by $64 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. We recorded equity losses of $20 million and $18 million during the three and nine months ended September 30, 2018, respectively, and equity in earnings of $3 million and $5 million during the three and nine months ended September 30, 2017 related to our investment in Mekonomen, including adjustments to convert the results to GAAP and to recognize the impact of our purchase accounting adjustments. In May 2018 and May 2017, we received cash dividends of $8 million (SEK 67 million) and $7 million (SEK 67 million), respectively, related to our investment in Mekonomen.
On July 6, 2018, Mekonomen announced the acquisition of two automotive spare parts distributors in Denmark and Poland. The objective of the acquisition is to strengthen Mekonomen's position in the sale of automotive spare parts in northern Europe and to establish a strong market position in Denmark and Poland, where Mekonomen has no current operations. The acquisition is partially being financed by a rights issue with preferential rights for Mekonomen's existing shareholders, who were given the right to subscribe for four new Mekonomen shares per seven existing owned shares at a discounted share price. On October 5, 2018, we subscribed for our pro rata share in the rights issue giving us the right to acquire an additional $48 million of equity in Mekonomen at a discounted share price, retaining our 26.5% equity interest. We recorded a derivative instrument of $29 million in Other assets on our Unaudited Condensed Consolidated Balance Sheets, which represents our right to acquire Mekonomen shares at a discount. We are measuring the derivative instrument at fair value, and we recorded a $3 million gain on our fair value remeasurement during the three months ended September 30, 2018; the gain is recorded in Other income, net on the Unaudited Condensed Consolidated Statements of Income. In the fourth quarter, we will record an $8 million loss related to the settlement of the derivative instrument in October 2018 due to a decrease in the Mekonomen share price from the last day of the third quarter to the settlement date.
We evaluated our investment in Mekonomen for other-than-temporary impairment as of September 30, 2018, and concluded the decline in fair value was other-than-temporary due to a prolonged and significant stock price decrease. Therefore, we recognized an other-than-temporary impairment of $23 million, which represents the difference in the carrying value and the fair value of our investment in Mekonomen. The fair value of our investment in Mekonomen was determined using the Mekonomen share price as of September 30, 2018. The impairment charge is recorded in Equity in (losses) earnings of unconsolidated subsidiaries in our Unaudited Condensed Consolidated Statements of Income. Equity in losses and earnings from our investment in Mekonomen are reported in the Europe segment. As a result of the impairment charge, the Level 1 fair value of our equity investment in the publicly traded Mekonomen common stock at September 30, 2018 approximated the carrying value of $134 million.
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 them. 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
33,670

Warranty claims
(31,980
)
Balance as of September 30, 2018
$
24,841


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 the prior 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 on 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 as of September 30, 2018 and our Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 was as follows (in thousands):
 
Balance as of September 30, 2018
 
As Reported
 
Amounts Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Balance Sheet
 
 
 
 
 
Assets
 
 
 
 
 
Accounts receivable
$
1,255,876

 
$
1,205,833

 
$
50,043

Prepaid expenses and other current assets
200,944

 
144,255

 
56,689

Liabilities
 
 
 
 
 
Refund liability
106,732

 

 
106,732

 
For the three months ended September 30, 2018
 
As Reported
 
Amounts Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Income Statement
 
 
 
 
 
Revenue
$
3,122,378

 
$
3,123,468

 
$
(1,090
)
Cost of goods sold
1,925,180

 
1,925,107

 
73

Selling, general and administrative expenses
879,150

 
880,313

 
(1,163
)
 
For the nine months ended September 30, 2018
 
As Reported
 
Amounts Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Income Statement
 
 
 
 
 
Revenue
$
8,873,893

 
$
8,882,558

 
$
(8,665
)
Cost of goods sold
5,460,845

 
5,467,061

 
(6,216
)
Selling, general and administrative expenses
2,472,085

 
2,474,534

 
(2,449
)

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 September 30, 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 upon adoption. Within our Unaudited Condensed Consolidating Statements of Cash Flows in Note 18, "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 upon adoption.
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.
During the first quarter of 2018, we adopted ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" ("ASU 2017-07"), which requires presentation of the current service cost component of net periodic benefit expense with other current compensation expenses for the related employees, and requires presentation of the remaining components of net periodic benefit expense, such as interest, expected return on plan assets, and amortization of actuarial gains and losses, outside of operating income. ASU 2017-07 also specifies that, on a prospective basis, only the service cost component is eligible for capitalization into inventory or other assets. While the income statement classification provisions of ASU 2017-07 are applicable on a retrospective basis, due to the immaterial impact to our Unaudited Condensed Consolidated Statements of Income in prior periods, we did not recast prior period income statement information and adopted the classification provisions on a prospective basis. The change in the capitalization provisions under ASU 2017-07 did not have a material impact on our unaudited condensed consolidated financial statements. See Note 13, "Employee Benefit Plans," for further disclosure on the components of net periodic benefit expense and classification of the components within our Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017.
During the third quarter of 2018, the FASB issued ASU No. 2018-15, "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" ("ASU 2018-15"). This update requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. ASU 2018-15 is effective for fiscal years and interim periods beginning after December 15, 2019; early adoption is permitted. We have adopted ASU 2018-15 in the third quarter of 2018 as we believe that our existing policy is consistent with the new guidance and thus no adjustments were required to be in compliance with this standard update.

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. During the second quarter, we completed phase one of the software roll-out for our North America and Specialty operations. We are nearing completion of the phase one roll-out in our Europe operations as of the filing date of this Quarterly Report on Form 10-Q.
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.
In August 2018, the FASB issued ASU No. 2018-13, "Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"), which removes, modifies, and adds certain disclosure requirements in ASC 820. ASU 2018-13 is effective for fiscal years and interim periods beginning after December 15, 2019; early adoption is permitted. We are in the process of evaluating the impact of this standard on our disclosures but do not believe that it will have a material impact.
In August 2018, the FASB issued ASU No. 2018-14, "Disclosure Framework- Changes to the Disclosure Requirements for Defined Benefit Plans" ("ASU 2018-14"), which removes, modifies, and adds certain disclosure requirements to ASC 715-20. ASU 2018-14 is effective for fiscal years and interim periods beginning after December 15, 2020; early adoption is permitted. We are in the process of evaluating the impact of this standard on our disclosures.
v3.10.0.1
Revenue Recognition Revenue Reconition (Notes)
9 Months Ended
Sep. 30, 2018
Revenue Recognition [Abstract]  
Revenue From Contract With Customer
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 obligations 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
North America
$
1,109,067

 
$
1,051,470

 
$
3,447,074

 
$
3,207,001

Europe
1,464,049

 
952,765

 
3,781,091

 
2,659,804

Specialty
388,865

 
329,522

 
1,151,172

 
1,005,776

Parts and services
2,961,981

 
2,333,757

 
8,379,337

 
6,872,581

Other
160,397

 
132,043

 
494,556

 
394,473