UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________
FORM 10-Q
____________________________
|
| |
x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 20182019
OR
|
| |
¨
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number: 000-50404
____________________________
LKQ CORPORATION
(Exact name of registrant as specified in its charter)
____________________________
|
| | | | |
DELAWAREDelaware | | 36-4215970 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | |
500 WEST MADISON STREET, SUITEWest Madison Street,
| Suite 2800 CHICAGO, IL |
| |
|
Chicago | Illinois |
| | 60661 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (312) (312) 621-1950
____________________________ Securities registered pursuant to Section 12(b) of the Act:
|
| | | | | | |
Title of Each Class | | Trading Symbol(s) | | Name of each exchange on which registered | |
Common Stock, par value $.01 per share | | LKQ | | NASDAQ | Global Select Market
|
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): |
| | | |
Large accelerated filerAccelerated Filer | x☒ | Accelerated filerFiler | ¨☐
|
Non-accelerated filerFiler | ¨ (Do not check if a smaller reporting company) ☐ | Smaller reporting companyReporting Company | ¨☐ |
Emerging growth companyGrowth Company | ¨☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
At October 24, 2018,25, 2019, the registrant had issued and outstanding an aggregate of 318,202,654306,461,589 shares of Common Stock.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income (In thousands, except per share data) |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenue | $ | 3,147,773 |
| | $ | 3,122,378 |
| | $ | 9,496,249 |
| | $ | 8,873,893 |
|
Cost of goods sold | 1,947,444 |
| | 1,925,180 |
| | 5,840,469 |
| | 5,460,845 |
|
Gross margin | 1,200,329 |
| | 1,197,198 |
| | 3,655,780 |
| | 3,413,048 |
|
Selling, general and administrative expenses | 892,124 |
| | 879,150 |
| | 2,687,024 |
| | 2,472,085 |
|
Restructuring and acquisition related expenses | 8,929 |
| | 6,614 |
| | 20,613 |
| | 26,546 |
|
Impairment of net assets held for sale | (3,601 | ) | | — |
| | 44,919 |
| | — |
|
Depreciation and amortization | 71,513 |
| | 76,701 |
| | 213,349 |
| | 196,322 |
|
Operating income | 231,364 |
| | 234,733 |
| | 689,875 |
| | 718,095 |
|
Other expense (income): | | | | | | | |
Interest expense, net of interest income | 31,976 |
| | 40,860 |
| | 103,949 |
| | 107,647 |
|
Other income, net | (5,939 | ) | | (6,959 | ) | | (15,523 | ) | | (9,414 | ) |
Total other expense, net | 26,037 |
| | 33,901 |
| | 88,426 |
| | 98,233 |
|
Income from continuing operations before provision for income taxes | 205,327 |
| | 200,832 |
| | 601,449 |
| | 619,862 |
|
Provision for income taxes | 57,747 |
| | 46,068 |
| | 165,122 |
| | 156,427 |
|
Equity in earnings (losses) of unconsolidated subsidiaries | 4,232 |
| | (20,284 | ) | | (33,745 | ) | | (18,326 | ) |
Income from continuing operations | 151,812 |
|
| 134,480 |
| | 402,582 |
| | 445,109 |
|
Net income from discontinued operations | 781 |
| | — |
| | 1,179 |
| | — |
|
Net income | 152,593 |
| | 134,480 |
| | 403,761 |
| | 445,109 |
|
Less: net (loss) income attributable to continuing noncontrolling interest | (46 | ) | | 378 |
| | 2,321 |
| | 1,040 |
|
Less: net income attributable to discontinued noncontrolling interest | 376 |
| | — |
| | 568 |
| | — |
|
Net income attributable to LKQ stockholders | $ | 152,263 |
| | $ | 134,102 |
| | $ | 400,872 |
| | $ | 444,069 |
|
| | | | | | | |
Basic earnings per share: (1) | | | | | | | |
Income from continuing operations | $ | 0.49 |
| | $ | 0.42 |
| | $ | 1.29 |
| | $ | 1.42 |
|
Net income from discontinued operations | 0.00 |
| | — |
| | 0.00 |
| | — |
|
Net income | 0.50 |
| | 0.42 |
| | 1.30 |
| | 1.42 |
|
Less: net (loss) income attributable to continuing noncontrolling interest | (0.00 | ) | | 0.00 |
| | 0.01 |
| | 0.00 |
|
Less: net income attributable to discontinued noncontrolling interest | 0.00 |
| | — |
| | 0.00 |
| | — |
|
Net income attributable to LKQ stockholders | $ | 0.50 |
| | $ | 0.42 |
| | $ | 1.29 |
| | $ | 1.42 |
|
| | | | | | | |
Diluted earnings per share: (1) | | | | | | | |
Income from continuing operations | $ | 0.49 |
| | $ | 0.42 |
|
| $ | 1.29 |
| | $ | 1.41 |
|
Net income from discontinued operations | 0.00 |
| | — |
| | 0.00 |
| | — |
|
Net income | 0.50 |
| | 0.42 |
| | 1.29 |
| | 1.41 |
|
Less: net (loss) income attributable to continuing noncontrolling interest | (0.00 | ) | | 0.00 |
| | 0.01 |
| | 0.00 |
|
Less: net income attributable to discontinued noncontrolling interest | 0.00 |
| | — |
| | 0.00 |
| | — |
|
Net income attributable to LKQ stockholders | $ | 0.49 |
| | $ | 0.42 |
| | $ | 1.28 |
| | $ | 1.41 |
|
LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income (In thousands, except per share data) |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
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 |
| | 2,472,085 |
| | 2,003,065 |
|
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 | $ | 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 |
|
Less: net income attributable to noncontrolling interest | 0.00 |
| | — |
| | 0.00 |
| | — |
|
Net income attributable to LKQ stockholders | $ | 0.42 |
| | $ | 0.39 |
| | $ | 1.41 |
| | $ | 1.32 |
|
(1)Selling, general and administrative expenses contain facility and warehouses expenses and distribution expenses that
were previously shown separately.
(2) The sum of the individual earnings per share amounts may not equal the total due to rounding.
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
2
LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Comprehensive Income (In thousands) | LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Comprehensive Income (In thousands) | LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Comprehensive Income (In thousands) |
| | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Net income | $ | 134,480 |
| | $ | 122,381 |
| | $ | 445,109 |
| | $ | 409,573 |
| $ | 152,593 |
| | $ | 134,480 |
| | $ | 403,761 |
| | $ | 445,109 |
|
Less: net income attributable to noncontrolling interest | 378 |
| | — |
| | 1,040 |
| | — |
| |
Less: net (loss) income attributable to continuing noncontrolling interest | | (46 | ) | | 378 |
| | 2,321 |
| | 1,040 |
|
Less: net income attributable to discontinued noncontrolling interest | | 376 |
| | — |
| | 568 |
| | — |
|
Net income attributable to LKQ stockholders | 134,102 |
| | 122,381 |
| | 444,069 |
| | 409,573 |
| 152,263 |
| | 134,102 |
| | 400,872 |
| | 444,069 |
|
| | | | | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | |
Other comprehensive (loss) income: | | | | | | | | |
Foreign currency translation, net of tax | (20,951 | ) | | 59,618 |
| | (77,630 | ) | | 174,794 |
| (69,819 | ) | | (20,951 | ) | | (74,112 | ) | | (77,630 | ) |
Net change in unrealized gains/losses on cash flow hedges, net of tax | 304 |
| | (1,776 | ) | | 5,964 |
| | 457 |
| (1,261 | ) | | 304 |
| | (9,648 | ) | | 5,964 |
|
Net change in unrealized gains/losses on pension plans, net of tax | 1,274 |
| | (150 | ) | | (154 | ) | | (4,053 | ) | (2,353 | ) | | 1,274 |
| | (2,134 | ) | | (154 | ) |
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 |
| |
Net change in other comprehensive income from unconsolidated subsidiaries | | 1,240 |
| | 643 |
| | 98 |
| | 2,160 |
|
Other comprehensive loss | | (72,193 | ) | | (18,730 | ) | | (85,796 | ) | | (69,660 | ) |
| | | | | | | | | | | | | | |
Comprehensive income | 115,750 |
| | 179,039 |
| | 375,449 |
| | 579,136 |
| 80,400 |
| | 115,750 |
| | 317,965 |
| | 375,449 |
|
Less: comprehensive income attributable to noncontrolling interest | 378 |
| | — |
| | 1,040 |
| | — |
| |
Less: comprehensive (loss) income attributable to continuing noncontrolling interest | | (46 | ) | | 378 |
|
| 2,321 |
|
| 1,040 |
|
Less: comprehensive income attributable to discontinued noncontrolling interest | | 376 |
| | — |
|
| 568 |
|
| — |
|
Comprehensive income attributable to LKQ stockholders | $ | 115,372 |
| | $ | 179,039 |
| | $ | 374,409 |
| | $ | 579,136 |
| $ | 80,070 |
| | $ | 115,372 |
| | $ | 315,076 |
| | $ | 374,409 |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Balance Sheets (In thousands, except share and per share data) | LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Balance Sheets (In thousands, except share and per share data) | LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Balance Sheets (In thousands, except share and per share data) |
| | September 30, | | December 31, | September 30, | | December 31, |
| 2018 | | 2017 | 2019 | | 2018 |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 341,346 |
| | $ | 279,766 |
| $ | 433,391 |
| | $ | 331,761 |
|
Receivables, net | 1,255,876 |
| | 1,027,106 |
| 1,223,197 |
| | 1,154,083 |
|
Inventories | 2,794,894 |
| | 2,380,783 |
| 2,582,188 |
| | 2,836,075 |
|
Prepaid expenses and other current assets | 200,944 |
| | 134,479 |
| 245,082 |
| | 199,030 |
|
Total current assets | 4,593,060 |
| | 3,822,134 |
| 4,483,858 |
| | 4,520,949 |
|
Property, plant and equipment, net | 1,201,003 |
| | 913,089 |
| 1,184,188 |
| | 1,220,162 |
|
Operating lease assets, net | | 1,303,260 |
| | — |
|
Intangible assets: | | | | | | |
Goodwill | 4,475,266 |
| | 3,536,511 |
| 4,309,822 |
| | 4,381,458 |
|
Other intangibles, net | 953,372 |
| | 743,769 |
| 837,272 |
| | 928,752 |
|
Equity method investments | 157,409 |
| | 208,404 |
| 144,009 |
| | 179,169 |
|
Other assets | 205,226 |
| | 142,965 |
| |
Other noncurrent assets | | 149,281 |
| | 162,912 |
|
Total assets | $ | 11,585,336 |
| | $ | 9,366,872 |
| $ | 12,411,690 |
| | $ | 11,393,402 |
|
Liabilities and Stockholders’ Equity | | | | |
Liabilities and Stockholders' Equity | | | | |
Current liabilities: | | | | | | |
Accounts payable | $ | 941,747 |
| | $ | 788,613 |
| $ | 997,874 |
| | $ | 942,398 |
|
Accrued expenses: | | | | | | |
Accrued payroll-related liabilities | 153,536 |
| | 143,424 |
| 162,152 |
| | 172,005 |
|
Refund liability | | 100,327 |
| | 104,585 |
|
Other accrued expenses | 358,212 |
| | 218,600 |
| 326,634 |
| | 288,425 |
|
Refund liability | 106,732 |
| | — |
| |
Other current liabilities | 57,088 |
| | 45,727 |
| 113,349 |
| | 61,109 |
|
Current portion of operating lease liabilities | | 225,572 |
| | — |
|
Current portion of long-term obligations | 118,365 |
| | 126,360 |
| 128,143 |
| | 121,826 |
|
Total current liabilities | 1,735,680 |
| | 1,322,724 |
| 2,054,051 |
| | 1,690,348 |
|
Long-term operating lease liabilities, excluding current portion | | 1,129,423 |
| | — |
|
Long-term obligations, excluding current portion | 4,250,137 |
| | 3,277,620 |
| 3,737,112 |
| | 4,188,674 |
|
Deferred income taxes | 325,537 |
| | 252,359 |
| 296,199 |
| | 311,434 |
|
Other noncurrent liabilities | 376,566 |
| | 307,516 |
| 322,205 |
| | 364,194 |
|
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 |
| |
Stockholders' equity: | | | | |
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 319,598,334 shares issued and 306,402,419 shares outstanding at September 30, 2019; 318,417,821 shares issued and 316,146,114 shares outstanding at December 31, 2018 | | 3,196 |
| | 3,184 |
|
Additional paid-in capital | 1,409,242 |
| | 1,141,451 |
| 1,427,382 |
| | 1,415,188 |
|
Retained earnings | 3,562,827 |
| | 3,124,103 |
| 3,999,748 |
| | 3,598,876 |
|
Accumulated other comprehensive loss | (134,791 | ) | | (70,476 | ) | (260,746 | ) | | (174,950 | ) |
Treasury stock, at cost; 13,195,915 shares at September 30, 2019 and 2,271,707 shares at December 31, 2018 | | (351,813 | ) | | (60,000 | ) |
Total Company stockholders' equity | 4,840,460 |
| | 4,198,169 |
| 4,817,767 |
| | 4,782,298 |
|
Noncontrolling interest | 56,956 |
| | 8,484 |
| 54,933 |
| | 56,454 |
|
Total stockholders' equity | 4,897,416 |
| | 4,206,653 |
| 4,872,700 |
| | 4,838,752 |
|
Total liabilities and stockholders’ equity | $ | 11,585,336 |
| | $ | 9,366,872 |
| |
Total liabilities and stockholders' equity | | $ | 12,411,690 |
| | $ | 11,393,402 |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Cash Flows (In thousands) | LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Cash Flows (In thousands) | LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Cash Flows (In thousands) |
| | Nine Months Ended | Nine Months Ended |
| September 30, | September 30, |
| 2018 | | 2017 | 2019 | | 2018 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income | $ | 445,109 |
| | $ | 409,573 |
| $ | 403,761 |
| | $ | 445,109 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | 210,977 |
| | 166,508 |
| 230,239 |
| | 210,977 |
|
Impairment on Mekonomen equity method investment | 22,715 |
| | — |
| |
Impairment of Mekonomen equity method investment | | 39,551 |
| | 22,715 |
|
Impairment of net assets held for sale | | 44,919 |
| | — |
|
Stock-based compensation expense | 17,544 |
| | 17,582 |
| 20,837 |
| | 17,544 |
|
Loss on sale of business | — |
| | 8,580 |
| |
Other | (7,187 | ) | | (11,982 | ) | (13,320 | ) | | (7,187 | ) |
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions: | | | | | | |
Receivables, net | (70,797 | ) | | (75,444 | ) | (102,381 | ) | | (70,797 | ) |
Inventories | (71,058 | ) | | (97,584 | ) | 148,237 |
| | (71,058 | ) |
Prepaid income taxes/income taxes payable | 7,262 |
| | (928 | ) | 40,711 |
| | 7,262 |
|
Accounts payable | (71,997 | ) | | 42,175 |
| 90,879 |
| | (71,997 | ) |
Other operating assets and liabilities | 38,599 |
| | (9,237 | ) | 61,738 |
| | 38,599 |
|
Net cash provided by operating activities | 521,167 |
| | 449,243 |
| 965,171 |
| | 521,167 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Purchases of property, plant and equipment | (171,763 | ) | | (135,537 | ) | (165,551 | ) | | (171,763 | ) |
Acquisitions, net of cash acquired | (1,206,067 | ) | | (252,667 | ) | (14,517 | ) | | (1,206,067 | ) |
Proceeds from disposals of business/investment | — |
| | 301,297 |
| |
Proceeds from disposal of businesses | | 19,505 |
| | — |
|
Investments in unconsolidated subsidiaries | (11,066 | ) | | (7,114 | ) | (6,894 | ) | | (11,066 | ) |
Receipts of deferred purchase price on receivables under factoring arrangements | 9,410 |
| | — |
| — |
| | 9,410 |
|
Other investing activities, net | 7,970 |
| | 9,864 |
| 7,368 |
| | 7,970 |
|
Net cash used in investing activities | (1,371,516 | ) | | (84,157 | ) | (160,089 | ) | | (1,371,516 | ) |
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 | ) | | — |
| — |
| | (16,938 | ) |
Proceeds from issuance of Euro Notes (2026/28) | 1,232,100 |
| | — |
| — |
| | 1,232,100 |
|
Purchase of treasury stock | | (291,813 | ) | | — |
|
Borrowings under revolving credit facilities | 1,025,496 |
| | 424,976 |
| 390,275 |
| | 1,025,496 |
|
Repayments under revolving credit facilities | (1,110,035 | ) | | (770,884 | ) | (613,758 | ) | | (1,110,035 | ) |
Repayments under term loans | (114,800 | ) | | (27,884 | ) | (6,563 | ) | | (114,800 | ) |
Borrowings under receivables securitization facility | — |
| | 8,525 |
| 36,600 |
| | — |
|
Repayments under receivables securitization facility | — |
| | (9,925 | ) | (146,600 | ) | | — |
|
(Repayments) borrowings of other debt, net | (38,695 | ) | | 24,522 |
| |
Payments of other obligations | — |
| | (2,079 | ) | |
Payment of notes issued from acquisitions | | (19,123 | ) | | — |
|
Repayments of other debt, net | | (31,587 | ) | | (38,695 | ) |
Other financing activities, net | 3,182 |
| | 4,316 |
| (7,125 | ) | | 2,186 |
|
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 |
| |
Net cash (used in) provided by financing activities | | (689,694 | ) | | 979,314 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | (9,702 | ) | | (67,385 | ) |
Net increase in cash, cash equivalents and restricted cash | | 105,686 |
| | 61,580 |
|
Cash, cash equivalents and restricted cash of continuing operations, beginning of period | | 337,250 |
| | 279,766 |
|
Cash, cash equivalents and restricted cash of continuing and discontinued operations, end of period | | 442,936 |
| | 341,346 |
|
Less: Cash and cash equivalents of discontinued operations, end of period | | 4,328 |
| | — |
|
Cash, cash equivalents and restricted cash, end of period | | $ | 438,608 |
| | $ | 341,346 |
|
| | | | |
Reconciliation of cash, cash equivalents and restricted cash | | | | |
Cash and cash equivalents | | $ | 433,391 |
| | $ | 341,346 |
|
Restricted cash included in Other noncurrent assets | | 5,217 |
| | — |
|
Cash, cash equivalents and restricted cash, end of period | | $ | 438,608 |
| | $ | 341,346 |
|
| | | | |
Supplemental disclosure of cash paid for: | | | | | | |
Income taxes, net of refunds | $ | 158,740 |
| | $ | 218,332 |
| $ | 134,998 |
| | $ | 158,740 |
|
Interest | 74,417 |
| | 57,519 |
| 86,525 |
| | 74,417 |
|
Supplemental disclosure of noncash investing and financing activities: | | | | | | |
Stock issued in acquisitions | $ | 251,334 |
| | $ | — |
| $ | — |
| | $ | 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 |
| 6,597 |
| | 11,010 |
|
Notes and other financing receivables in connection with disposals of business/investment | — |
| | 5,848 |
| |
Notes payable and other financing obligations, including notes issued, debt assumed and settlement of pre-existing balances in connection with business acquisitions | | 45,311 |
| | 82,664 |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Stockholders’ Equity (In thousands) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | LKQ Stockholders | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares Issued | | Amount | |
BALANCE, July 1, 2018 | 317,821 |
| | $ | 3,178 |
| | $ | 1,403,630 |
| | $ | 3,428,725 |
| | $ | (116,061 | ) | | $ | 57,503 |
| | $ | 4,776,975 |
|
Net income | — |
| | — |
| | — |
| | 134,102 |
| | — |
| | 378 |
| | 134,480 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (18,730 | ) | | — |
| | (18,730 | ) |
Vesting of restricted stock units, net of shares withheld for employee tax | 256 |
| | 3 |
| | (937 | ) | | — |
| | — |
| | — |
| | (934 | ) |
Stock-based compensation expense | — |
| | — |
| | 5,700 |
| | — |
| | — |
| | — |
| | 5,700 |
|
Exercise of stock options | 120 |
| | 1 |
| | 849 |
| | — |
| | — |
| | — |
| | 850 |
|
Capital contributions from, net of dividends to, noncontrolling interest shareholder | — |
| | — |
| | — |
| | — |
| | — |
| | (925 | ) | | (925 | ) |
BALANCE, September 30, 2018 | 318,197 |
| | $ | 3,182 |
| | $ | 1,409,242 |
| | $ | 3,562,827 |
| | $ | (134,791 | ) | | $ | 56,956 |
| | $ | 4,897,416 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Cash Flows (In thousands) |
| | | | | | | |
Notes issued in connection with purchase of noncontrolling interest | 14,196 |
| | — |
|
Contingent consideration liabilities | 5,377 |
| | 3,107 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | LKQ Stockholders | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares Issued | | Amount | |
BALANCE, January 1, 2018 | 309,127 |
| | $ | 3,091 |
| | $ | 1,141,451 |
| | $ | 3,124,103 |
| | $ | (70,476 | ) | | $ | 8,484 |
| | $ | 4,206,653 |
|
Net income | — |
| | — |
| | — |
| | 444,069 |
| | — |
| | 1,040 |
| | 445,109 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (69,660 | ) | | — |
| | (69,660 | ) |
Stock issued in acquisitions | 8,056 |
| | 81 |
| | 251,253 |
| | — |
| | — |
| | — |
| | 251,334 |
|
Vesting of restricted stock units, net of shares withheld for employee tax | 600 |
| | 6 |
| | (3,717 | ) | | — |
| | — |
| | — |
| | (3,711 | ) |
Stock-based compensation expense | — |
| | — |
| | 17,544 |
| | — |
| | — |
| | — |
| | 17,544 |
|
Exercise of stock options | 441 |
| | 4 |
| | 3,768 |
| | — |
| | — |
| | — |
| | 3,772 |
|
Shares withheld for net share settlement of stock option awards | (27 | ) | | — |
| | (1,057 | ) | | — |
| | — |
| | — |
| | (1,057 | ) |
Adoption of ASU 2018-02 (see Note 4) | — |
| | — |
| | — |
| | (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 |
|
BALANCE, September 30, 2018 | 318,197 |
| | $ | 3,182 |
| | $ | 1,409,242 |
| | $ | 3,562,827 |
| | $ | (134,791 | ) | | $ | 56,956 |
| | $ | 4,897,416 |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
6
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Stockholders’ Equity (In thousands) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | LKQ Stockholders | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders' Equity |
| Shares Issued | | Amount | |
BALANCE, July 1, 2017 | 308,621 |
| | $ | 3,086 |
| | $ | 1,130,318 |
| | $ | 2,877,551 |
| | $ | (154,270 | ) | | $ | 3,856,685 |
|
Net income | — |
| | — |
| | — |
| | 122,381 |
| | — |
| | 122,381 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 56,658 |
| | 56,658 |
|
Vesting of restricted stock units, net of shares withheld for employee tax | 259 |
| | 2 |
| | (1,142 | ) | | — |
| | — |
| | (1,140 | ) |
Stock-based compensation expense | — |
| | — |
| | 5,139 |
| | — |
| | — |
| | 5,139 |
|
Exercise of stock options | 139 |
| | 2 |
| | 1,312 |
| | — |
| | — |
| | 1,314 |
|
Shares withheld for net share settlement of stock option awards | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
BALANCE, September 30, 2017 | 309,018 |
| | $ | 3,090 |
| | $ | 1,135,627 |
| | $ | 2,999,932 |
| | $ | (97,612 | ) | | $ | 4,041,037 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Stockholders' Equity (In thousands) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LKQ Stockholders | | | | |
| Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Amount | | Shares | | Amount |
BALANCE, July 1, 2019 | 319,010 |
| | $ | 3,190 |
| | (9,315 | ) | | $ | (250,762 | ) | | $ | 1,429,129 |
| | $ | 3,847,485 |
| | $ | (188,553 | ) | | $ | 69,259 |
| | $ | 4,909,748 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 152,263 |
| | — |
| | 330 |
| | 152,593 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (72,193 | ) | | — |
| | (72,193 | ) |
Purchase of treasury stock | — |
| | — |
| | (3,881 | ) | | (101,051 | ) | | — |
| | — |
| | — |
| | — |
| | (101,051 | ) |
Vesting of restricted stock units, net of shares withheld for employee tax | 313 |
| | 3 |
| | — |
| | — |
| | (650 | ) | | — |
| | — |
| | — |
| | (647 | ) |
Stock-based compensation expense | — |
| | — |
| | — |
| | — |
| | 7,178 |
| | — |
| | — |
| | — |
| | 7,178 |
|
Exercise of stock options | 370 |
| | 4 |
| | — |
| | — |
| | 3,594 |
| | — |
| | — |
| | — |
| | 3,598 |
|
Tax withholdings related to net share settlements of stock-based compensation awards | (95 | ) | | (1 | ) | | — |
| | — |
| | (3,105 | ) | | — |
| | — |
| | — |
| | (3,106 | ) |
Capital contributions from, net of dividends declared to, noncontrolling interest shareholder | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,644 | ) | | (4,644 | ) |
Acquired noncontrolling interest (1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 104 |
| | 104 |
|
Purchase of noncontrolling interest (2) | — |
| | — |
| | — |
| | — |
| | (8,764 | ) | | — |
| | — |
| | (10,116 | ) | | (18,880 | ) |
BALANCE, September 30, 2019 | 319,598 |
| | $ | 3,196 |
| | (13,196 | ) | | $ | (351,813 | ) | | $ | 1,427,382 |
| | $ | 3,999,748 |
| | $ | (260,746 | ) | | $ | 54,933 |
| | $ | 4,872,700 |
|
(1) The amount acquired during 2019 relates to discontinued operations. See Note 3, "Discontinued Operations," for further details.
(2) The amount recorded in 2019 relates to the purchase of noncontrolling interest unrelated to a business combination. Refer to "Stockholders' Equity" in Note 4, "Financial Statement Information" for further information.
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Stockholders' Equity (In thousands) | | LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Stockholders' Equity (In thousands) |
|
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | LKQ Stockholders | | | | |
| | | | | LKQ Stockholders | | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest | | Total Stockholders' Equity |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders' Equity | Shares | | Amount | |
| Shares Issued | | Amount | | |
BALANCE, January 1, 2017 | 307,545 |
| | $ | 3,075 |
| | $ | 1,116,690 |
| | $ | 2,590,359 |
| | $ | (267,175 | ) | | $ | 3,442,949 |
| |
BALANCE, July 1, 2018 | | 317,821 |
| | $ | 3,178 |
| | $ | 1,403,630 |
| | $ | 3,428,725 |
| | $ | (116,061 | ) | | $ | 57,503 |
| | $ | 4,776,975 |
|
Net income | — |
| | — |
| | — |
| | 409,573 |
| | — |
| | 409,573 |
| — |
| | — |
| | — |
| | 134,102 |
| | — |
| | 378 |
| | 134,480 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 169,563 |
| | 169,563 |
| |
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (18,730 | ) | | — |
| | (18,730 | ) |
Vesting of restricted stock units, net of shares withheld for employee tax | 736 |
| | 7 |
| | (3,902 | ) | | — |
| | — |
| | (3,895 | ) | 256 |
| | 3 |
| | (937 | ) | | — |
| | — |
| | — |
| | (934 | ) |
Stock-based compensation expense | — |
| | — |
| | 17,582 |
| | — |
| | — |
| | 17,582 |
| — |
| | — |
| | 5,700 |
| | — |
| | — |
| | — |
| | 5,700 |
|
Exercise of stock options | 772 |
| | 8 |
| | 6,457 |
| | — |
| | — |
| | 6,465 |
| 120 |
| | 1 |
| | 849 |
| | — |
| | — |
| | — |
| | 850 |
|
Shares withheld for net share settlement of stock option awards | (35 | ) | | — |
| | (1,200 | ) | | — |
| | — |
| | (1,200 | ) | |
BALANCE, September 30, 2017 | 309,018 |
| | $ | 3,090 |
| | $ | 1,135,627 |
| | $ | 2,999,932 |
| | $ | (97,612 | ) | | $ | 4,041,037 |
| |
Capital contributions from, net of dividends to, noncontrolling interest shareholder | | — |
| | — |
| | — |
| | — |
| | — |
| | (925 | ) | | (925 | ) |
BALANCE, September 30, 2018 | | 318,197 |
| | $ | 3,182 |
| | $ | 1,409,242 |
| | $ | 3,562,827 |
| | $ | (134,791 | ) | | $ | 56,956 |
| | $ | 4,897,416 |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
7
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Stockholders' Equity (In thousands) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LKQ Stockholders | | | | |
| Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Amount | | Shares | | Amount | |
BALANCE, January 1, 2019 | 318,418 |
| | $ | 3,184 |
| | (2,272 | ) | | $ | (60,000 | ) | | $ | 1,415,188 |
| | $ | 3,598,876 |
| | $ | (174,950 | ) | | $ | 56,454 |
| | $ | 4,838,752 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 400,872 |
| | — |
| | 2,889 |
| | 403,761 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| |
|
| | (85,796 | ) | |
|
| | (85,796 | ) |
Purchase of treasury stock | — |
| | — |
| | (10,924 | ) | | (291,813 | ) | | — |
| | — |
| | — |
| | — |
| | (291,813 | ) |
Vesting of restricted stock units, net of shares withheld for employee tax | 684 |
| | 7 |
| | — |
| | — |
| | (1,808 | ) | | — |
| | — |
| | — |
| | (1,801 | ) |
Stock-based compensation expense | — |
| | — |
| | — |
| | — |
| | 20,837 |
| | — |
| | — |
| | — |
| | 20,837 |
|
Exercise of stock options | 606 |
| | 6 |
| | — |
| | — |
| | 5,462 |
| | — |
| | — |
| | — |
| | 5,468 |
|
Tax withholdings related to net share settlements of stock-based compensation awards | (110 | ) | | (1 | ) | | — |
| | — |
| | (3,533 | ) | | — |
| | — |
| | — |
| | (3,534 | ) |
Capital contributions from, net of dividends declared to, noncontrolling interest shareholder | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,659 | ) | | (4,659 | ) |
Acquired noncontrolling interest (1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10,365 |
| | 10,365 |
|
Purchase of noncontrolling interest (2) | — |
| | — |
| | — |
| | — |
| | (8,764 | ) | | — |
| | — |
| | (10,116 | ) | | (18,880 | ) |
BALANCE, September 30, 2019 | 319,598 |
| | $ | 3,196 |
| | (13,196 | ) | | $ | (351,813 | ) | | $ | 1,427,382 |
| | $ | 3,999,748 |
| | $ | (260,746 | ) | | $ | 54,933 |
| | $ | 4,872,700 |
|
(1) The amount acquired during 2019 relates to discontinued operations. See Note 3, "Discontinued Operations," for further details.
(2) The amount recorded in 2019 relates to the purchase of noncontrolling interest unrelated to a business combination. Refer to "Stockholders' Equity" in Note 4, "Financial Statement Information" for further information.
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Stockholders' Equity (In thousands) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| LKQ Stockholders | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Amount | |
BALANCE, January 1, 2018 | 309,127 |
| | $ | 3,091 |
| | $ | 1,141,451 |
| | $ | 3,124,103 |
| | $ | (70,476 | ) | | $ | 8,484 |
| | $ | 4,206,653 |
|
Net income | — |
| | — |
| | — |
| | 444,069 |
| | — |
| | 1,040 |
| | 445,109 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (69,660 | ) | | — |
| | (69,660 | ) |
Stock issued in acquisitions | 8,056 |
| | 81 |
| | 251,253 |
| | — |
| | — |
| | — |
| | 251,334 |
|
Vesting of restricted stock units, net of shares withheld for employee tax | 600 |
| | 6 |
| | (3,717 | ) | | — |
| | — |
| | — |
| | (3,711 | ) |
Stock-based compensation expense | — |
| | — |
| | 17,544 |
| | — |
| | — |
| | — |
| | 17,544 |
|
Exercise of stock options | 441 |
| | 4 |
| | 3,768 |
| | — |
| | — |
| | — |
| | 3,772 |
|
Shares withheld for net share settlement of stock option awards | (27 | ) | | — |
| | (1,057 | ) | | — |
| | — |
| | — |
| | (1,057 | ) |
Adoption of ASU 2018-02 (see Note 9) | — |
| | — |
| | — |
| | (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 |
|
BALANCE, September 30, 2018 | 318,197 |
|
| $ | 3,182 |
|
| $ | 1,409,242 |
|
| $ | 3,562,827 |
|
| $ | (134,791 | ) |
| $ | 56,956 |
|
| $ | 4,897,416 |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
8
LKQ CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
| |
Note 1. | Interim Financial Statements |
The accompanying unaudited condensed consolidated financial statements represent the consolidation of LKQ Corporation, a Delaware corporation, and its subsidiaries. LKQ Corporation is a holding company and all operations are conducted by subsidiaries. When the terms "LKQ," "the Company," "we," "us," or "our" are used in this document, those terms refer to LKQ Corporation and its consolidated subsidiaries.
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to interim financial statements. Accordingly, certain information related to our significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted. These unaudited condensed consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normally recurring adjustments) necessary to fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Operating results for interim periods are not necessarily indicative of the results that can be expected for any subsequent interim period or for a full year. These interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 20172018 filed with the SEC on February 28, March 1, 2019 ("2018 ("2017 Form 10-K").
Note 2. Business Combinations
During the nine months ended September 30, 2019, we completed 5 acquisitions, including 1 wholesale business and 1 self service business in North America, and 3 wholesale businesses in Europe. These acquisitions were not material to our results of operations or financial position as of and for the three and nine months ended September 30, 2019. Total acquisition date fair value of the consideration for our acquisitions for the nine months ended September 30, 2019 was $48 million, composed of $17 million of cash paid (net of cash acquired), $5 million for the estimated value of contingent payments to former owners (with maximum payments totaling $7 million), $1 million of other purchase price obligations (non-interest bearing), $21 million of notes payable, and $4 million of pre-existing balances considered to be effectively settled as a result of the acquisitions. In addition, we assumed $8 million of existing debt as of the acquisition dates.
On May 30, 2018, we acquired Stahlgruber GmbH ("Stahlgruber"), a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories with operations in Germany, Austria, Italy, Slovenia, and Croatia, 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. We recorded $915 million ($908 million in 2018 and $7 million of adjustments in the six months ended June 30, 2019) of goodwill related to our acquisition of Stahlgruber.
On May 3, 2018, the European Commission cleared the acquisition of Stahlgruber for the entire European Union, except with respect to the wholesale automotive parts business in the Czech Republic. The acquisition of theStahlgruber’s Czech Republic wholesale business has beenwas referred to the Czech Republic competition authority for review. On May 10, 2019, the Czech Republic competition authority approved our acquisition of Stahlgruber’s Czech Republic wholesale business subject to the requirement that we divest certain of the acquired locations. We acquired Stahlgruber’s Czech Republic wholesale business on May 29, 2019 and decided to divest all of the acquired locations. We immediately classified the business as discontinued operations because the business was never integrated into our Europe segment; see Note 3, "Discontinued Operations" for further information. The Czech Republic wholesale business represents an immaterial portion of Stahlgruber's revenue and profitability.
We recorded $929 million of goodwill related There was no additional consideration beyond the previously remitted amounts for the Stahlgruber transaction required to ourcomplete the 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.Czech Republic wholesale business.
In addition to our acquisition of Stahlgruber, during the nine monthsyear ended September 30,December 31, 2018, we completed acquisitions of one4 wholesale businessbusinesses in North America and seven9 wholesale businesses in Europe. Total acquisition date fair value of the consideration for these acquisitions was $86$99 million, composed of $76$85 million of cash paid (net of cash and restricted cash acquired), $7$11 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 monthsyear ended September 30,December 31, 2018, we recorded $72$68 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.acquisitions.
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, 20182019 and the last three months of the year ended December 31, 20172018 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.
FromDuring the date of our preliminary allocation for Stahlgruber in the secondthird 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 2018,2019, 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, 20172018 are as follows (in thousands):
| | | Nine Months Ended | | Year Ended | Year Ended |
| September 30, 2018 | | December, 31, 2017 | December 31, 2018 |
| Stahlgruber | | Other Acquisitions (2) | | Total | | All Acquisitions (1) | Stahlgruber | | Other Acquisitions (1) | | Total |
Receivables | $ | 140,979 |
| | $ | 15,369 |
| | $ | 156,348 |
| | $ | 73,782 |
| $ | 144,826 |
| | $ | 19,171 |
| | $ | 163,997 |
|
Receivable reserves | (2,818 | ) | | (875 | ) | | (3,693 | ) | | (7,032 | ) | (2,818 | ) | | (918 | ) | | (3,736 | ) |
Inventories (3) | 374,056 |
| | 12,240 |
| | 386,296 |
| | 150,342 |
| 380,238 |
| | 14,021 |
| | 394,259 |
|
Prepaid expenses and other current assets | 9,537 |
| | 1,806 |
| | 11,343 |
| | (295 | ) | 10,970 |
| | 1,851 |
| | 12,821 |
|
Property, plant and equipment | 260,661 |
| | 6,089 |
| | 266,750 |
| | 41,039 |
| 271,292 |
| | 5,711 |
| | 277,003 |
|
Goodwill | 929,376 |
| | 68,254 |
| | 997,630 |
| | 314,817 |
| 908,253 |
| | 64,637 |
| | 972,890 |
|
Other intangibles | 285,529 |
| | 16,315 |
| | 301,844 |
| | 181,216 |
| 285,255 |
| | 35,159 |
| | 320,414 |
|
Other assets | 16,625 |
| | 37 |
| | 16,662 |
| | 3,257 |
| |
Other noncurrent assets | | 16,625 |
| | 37 |
| | 16,662 |
|
Deferred income taxes | (97,805 | ) | | (716 | ) | | (98,521 | ) | | (65,087 | ) | (78,130 | ) | | (5,285 | ) | | (83,415 | ) |
Current liabilities assumed | (343,221 | ) | | (20,662 | ) | | (363,883 | ) | | (111,484 | ) | (346,788 | ) | | (20,116 | ) | | (366,904 | ) |
Debt assumed | (65,852 | ) | | (4,410 | ) | | (70,262 | ) | | (33,586 | ) | (79,925 | ) | | (4,875 | ) | | (84,800 | ) |
Other noncurrent liabilities assumed (4)(2) | (81,689 | ) | | (9,993 | ) | | (91,682 | ) | | (1,917 | ) | (80,824 | ) | | (10,306 | ) | | (91,130 | ) |
Noncontrolling interest | (44,250 | ) | | — |
| | (44,250 | ) | | — |
| (44,110 | ) | | — |
| | (44,110 | ) |
Contingent consideration liabilities | — |
| | (3,107 | ) | | (3,107 | ) | | (6,234 | ) | — |
| | (3,107 | ) | | (3,107 | ) |
Other purchase price obligations | (2,349 | ) | | 3,853 |
| | 1,504 |
| | (5,074 | ) | (6,084 | ) | | 3,623 |
| | (2,461 | ) |
Stock issued | (251,334 | ) | | — |
| | (251,334 | ) | | — |
| (251,334 | ) | | — |
| | (251,334 | ) |
Notes issued | — |
| | (6,948 | ) | | (6,948 | ) | | (20,187 | ) | — |
| | (11,347 | ) | | (11,347 | ) |
Settlement of pre-existing balances | — |
| | — |
| | — |
| | 242 |
| |
Gains on bargain purchases (5) | — |
| | (328 | ) | | (328 | ) | | (3,870 | ) | |
Gains on bargain purchases (3) | | — |
| | (2,418 | ) | | (2,418 | ) |
Settlement of other purchase price obligations (non-interest bearing) | — |
| | 1,698 |
| | 1,698 |
| | 3,159 |
| — |
| | 1,711 |
| | 1,711 |
|
Cash used in acquisitions, net of cash acquired | $ | 1,127,445 |
| | $ | 78,622 |
| | $ | 1,206,067 |
| | $ | 513,088 |
| |
Cash used in acquisitions, net of cash and restricted cash acquired | | $ | 1,127,446 |
| | $ | 87,549 |
| | $ | 1,214,995 |
|
| |
(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 acquisition of Warn acquisitionIndustries, Inc. in 2017 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)(2) | The amount recorded for our acquisition of Stahlgruber includes a $75$79 million liability for certain pension obligations. See Note 13, "Employee Benefit Plans" for information related to our defined benefit plans. |
| |
(5)(3) | The amountamounts recorded during the nine monthsyear ended September 30,December 31, 2018 isare due to the gaingains on bargain purchasepurchases related to (i) an acquisition in Europe completed in the second quarter of 2017 as a result of a changechanges in the acquisition date fair value of the consideration. The amount recordedconsideration, and (ii) three acquisitions in Europe completed 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") acquisition2018 as a result of changes to our estimateestimates of the fair valuevalues 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, discount rates, assumed royalty rates and customer attrition rates, all of which are Level 3 inputs. We used the relief-from-royalty method to value trade names, trademarks, software and other technology assets, and we used the multi-period excess earnings method to value customer relationships. The relief-from-royalty method assumes that the intangible asset has value to the extent that its owner is relieved of the obligation to pay royalties for the benefits received from the intangible asset. The multi-period excess earnings method is based on the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset charges. 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 expandsexpanded 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 willshould 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, 20182019 and the year ended December 31, 20172018 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, 20182019 as though the businesses had been acquired as of January 1, 2017,2018, and the businesses acquired during the year ended December 31, 20172018 as though they had been acquired as of January 1, 2016.2017. We have excluded the May 29, 2019 acquisition of the Czech Republic wholesale business as the business was never integrated into our Europe segment. 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, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenue, as reported | $ | 3,147,773 |
| | $ | 3,122,378 |
| | $ | 9,496,249 |
| | $ | 8,873,893 |
|
Revenue of purchased businesses for the period prior to acquisition: | | | | | | | |
Stahlgruber | — |
| | — |
| | — |
| | 815,405 |
|
Other acquisitions | — |
| | 33,708 |
| | 16,481 |
| | 133,545 |
|
Pro forma revenue | $ | 3,147,773 |
| | $ | 3,156,086 |
| | $ | 9,512,730 |
| | $ | 9,822,843 |
|
| | | | | | | |
Income from continuing operations, as reported (1) | $ | 151,812 |
| | $ | 134,480 |
| | $ | 402,582 |
| | $ | 445,109 |
|
Income from continuing operations of purchased businesses for the period prior to acquisition, and pro forma purchase accounting adjustments: | | | | | | | |
Stahlgruber | 4,368 |
| | 5,624 |
| | 10,484 |
| | 14,114 |
|
Other acquisitions | 314 |
| | 1,863 |
| | 2,161 |
| | 4,780 |
|
Acquisition related expenses, net of tax (2) | 1,174 |
| | 681 |
| | 1,498 |
| | 13,986 |
|
Pro forma income from continuing operations | 157,668 |
| | 142,648 |
| | 416,725 |
| | 477,989 |
|
Less: Net (loss) income attributable to continuing noncontrolling interest, as reported | (46 | ) | | 378 |
| | 2,321 |
| | 1,040 |
|
Less: Pro forma net income attributable to continuing noncontrolling interest | — |
| | — |
| | — |
| | 2,799 |
|
Pro forma net income from continuing operations attributable to LKQ stockholders (3) | $ | 157,714 |
| | $ | 142,270 |
| | $ | 414,404 |
| | $ | 474,150 |
|
|
| | | | | | | | | | | | | | | |
| 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) | Includes2018 amounts include 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 sumExcludes our acquisition of the individual earnings per share amounts may not equal the total due to rounding.Czech Republic wholesale business which is classified as discontinued operations. |
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.
Note 3. Discontinued Operations
On March 1, 2017, LKQ completedAs described in Note 2, "Business Combinations," we classified the sale ofacquired Stahlgruber Czech Republic wholesale business as discontinued operations. We intend to divest 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,within the next year, and thus, the 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 operationsassets are reflected on the Unaudited Condensed Consolidated StatementsBalance Sheet at the lower of Income (in thousands):fair value less cost to sell or carrying value. As of September 30, 2019, the assets held for sale, liabilities held for sale, and noncontrolling interest are recorded within Prepaid expenses and other current assets, Other current liabilities, and Noncontrolling interest, respectively, on the Unaudited Condensed Consolidated Balance Sheet. As of the acquisition date, we acquired $5 million of cash and assumed $6 million of existing debt.
|
| | | |
| 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 operationsFair value was based on the expected debtestimated selling price, the inputs of which included projected market multiples and any reasonable offers. Due to be repaid. Under this approach, allocated interestthe uncertainties in the estimation process, it is possible that actual results could differ from January 1, 2017 through the date of sale was $2 million. This expense was offset by foreign currency gains.
(2) Inestimates used in the first quarter of 2017, upon closing ofCompany's analysis. The inputs utilized in the sale and write-offfair value estimate are classified as Level 3 within the fair value hierarchy. The fair value of the net assets of the glass manufacturing business, we recordedwas measured on a pre-tax loss on salenon-recurring basis as 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.2019.
Note 4. Financial Statement Information
Allowance for Doubtful Accounts
We have a reserve for uncollectible accounts, which was approximately $63$50 million and $58$57 million at September 30, 20182019 and December 31, 2017,2018, 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, |
| 2019 | | 2018 |
Aftermarket and refurbished products | $ | 2,117,275 |
| | $ | 2,309,458 |
|
Salvage and remanufactured products | 438,845 |
| | 503,199 |
|
Manufactured products | 26,068 |
| | 23,418 |
|
Total inventories | $ | 2,582,188 |
| | $ | 2,836,075 |
|
|
| | | | | | | |
| 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, 2019, manufactured products inventory was composed of $17 million of raw materials, $3 million of work in process, and $6 million of finished goods. As of December 31, 2018, manufactured products inventory was composed of $16$17 million of raw materials, $2 million of work in process, and $4 million of finished goods.
Net Assets Held for Sale
During the first six months of 2019, we committed to plans to sell certain businesses in our North America and Europe segments. As a result, these businesses were classified as net assets held for sale and were required to be adjusted to the lower of December 31, 2017, manufactured products inventory was composedfair value less cost to sell or carrying value, resulting in impairment charges totaling $49 million through the six months ended June 30, 2019 (presented in Impairment of $10net assets held for sale in the Unaudited Condensed Consolidated Statement of Income). In the third quarter of 2019, we completed the sales of 2 of these businesses, our aviation business in North America and a wholesale business in Bulgaria. The proceeds exceeded our prior fair value estimates, resulting in a net $4 million reduction of previously reported impairment charges for the three months ended September 30, 2019 and a net
$45 million impairment charge for the nine months ended September 30, 2019. The disposed businesses were immaterial, generating annualized revenue of approximately $55 million during the twelve-month period ended September 30, 2019.
Excluding the Stahlgruber Czech Republic wholesale business discussed in Note 3, "Discontinued Operations," as of September 30, 2019, there were $13 million of raw materials, $2assets held for sale, including $3 million of work in process,goodwill that was reclassified as held for sale related to our Europe segment, and $4 million of finished goods.
Our May 2018 acquisition of Stahlgruber contributed $374 million to our aftermarketliabilities held for sale, which were recorded within Prepaid expenses and refurbished products inventory. See Note 2, "Business Combinations" for further information on our acquisitions.
Property, Plantother current assets 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 soldOther current liabilities, respectively, on the Unaudited Condensed Consolidated StatementsBalance Sheet. We expect the remaining assets held for sale to be disposed of Income. All other depreciation expense is reported in Depreciation and amortization. Total depreciation expenseduring the next twelve months. The remaining assets held for sale generated annualized revenue of approximately $84 million during the three and nine monthstwelve-month period ended September 30, 20182019.
We are required to record net assets of our held for sale businesses at the lower of fair value less cost to sell or carrying value. Fair values were based on projected discounted cash flows and/or estimated selling prices. Management's assumptions for our discounted cash flow analysis of the businesses were based on projected revenues and profits, tax rates, capital expenditures, working capital requirements and discount rates. For businesses for which we utilized estimated selling prices to calculate the fair value, the inputs to our estimates included projected market multiples and any reasonable offers. Due to uncertainties in the estimation process, it is possible that actual results could differ from the estimates used in our analysis. The inputs utilized in the fair value estimates are classified as Level 3 within the fair value hierarchy. The fair values of the net assets were measured on a non-recurring basis as of September 30, 2019.
Investments in Unconsolidated Subsidiaries
Our investment in unconsolidated subsidiaries was $39$144 million and $115$179 million respectively,as of September 30, 2019 and $34December 31, 2018, respectively.
Europe Segment
Our investment in unconsolidated subsidiaries in Europe was $127 million and $93$163 million as of September 30, 2019 and December 31, 2018, respectively. We recorded equity in earnings of $4 million and equity in losses of $35 million during the three and nine months ended September 30, 2017, respectively.
Intangible Assets
Intangible assets consist primarily2019, respectively, and equity in losses 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$20 million and $96$18 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 investmentrelated to our investments in unconsolidated subsidiaries was $157 million and $208 million as of September 30, 2018 and December 31, 2017, respectively. in our Europe segment, mainly related to our investment in Mekonomen AB ("Mekonomen").
On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen AB ("Mekonomen") for an aggregate purchase price of $181 million. HeadquarteredIn October 2018, we acquired an additional $48 million of equity in Stockholm, Sweden, Mekonomen is the leading independent car parts and service chain in the Nordic regionat a discounted share price as part 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 electionits rights issue, increasing our equity interest 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.26.6%. We are accounting for our interest in Mekonomen using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over the investee. As of September 30, 2018, the book value of our investment in Mekonomen exceeded2019, our share of the book value of Mekonomen's net assets exceeded the book value of our investment in Mekonomen by $64$5 million; this difference is primarily related to goodwill and the fair valueMekonomen's Accumulated Other Comprehensive Income balance as of other intangible assets.our acquisition date in 2016. 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
During the three and nine months ended March 31, 2019 and September 30, 2018, respectively, and equity in earningswe recognized other-than-temporary impairment charges of $3$40 million and $5$23 million, duringrespectively, which represented the threedifference in the carrying value and nine months ended September 30, 2017 related tothe fair value of our investment in Mekonomen. The fair value of our investment in Mekonomen including adjustments to convertwas determined using the results to GAAPMekonomen share prices of SEK 65 and to recognize the impactSEK 126 as of March 31, 2019 and September 30, 2018, respectively. The impairment charges are recorded in Equity in earnings (losses) of unconsolidated subsidiaries in our purchase accounting adjustments. Unaudited Condensed Consolidated Statements of Income.
In May 2018, and May 2017, we received a cash dividendsdividend 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 in February 2019 that the acquisitionMekonomen Board of two automotive spare parts distributorsDirectors has proposed no dividend payment in Denmark and Poland.2019. The objectiveLevel 1 fair value of the acquisition is to strengthen Mekonomen's positionour equity investment in the salepublicly traded Mekonomen common stock at September 30, 2019 was $126 million (using the Mekonomen share price of automotive spare partsSEK 83 as of September 30, 2019) compared to a carrying value of $115 million.
In 2018, we participated 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 rightsrights 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,As of September 30, 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 noncurrent assets on our Unaudited Condensed Consolidated Balance Sheets, which representsrepresented our right to acquire Mekonomen shares at a discount. We are measuringmeasured the derivative instrument at fair value, and we recorded a $3$3 million gain on our fair value remeasurement during the three months ended September 30, 2018; the gain iswas recorded in Other income, net onin the Unaudited Condensed Consolidated Statements of Income. In the fourth quarter, we will record an $8
North America Segment
million loss related to the settlement of the derivative instrument13
Our investment in October 2018 due to a decreaseunconsolidated subsidiaries 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 impairmentNorth America segment was $17 million and $16 million as of September 30, 2019 and December 31, 2018, respectively. The equity in earnings for the North America equity investments was immaterial during each of the three 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 ofnine months ended 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 losses2019 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.2018.
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 onin 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, 2018 | $ | 23,262 |
|
Warranty expense | 43,883 |
|
Warranty claims | (39,969 | ) |
Balance as of September 30, 2019 | $ | 27,176 |
|
|
| | | |
Balance as of December 31, 2017 | $ | 23,151 |
|
Warranty expense | 33,670 |
|
Warranty claims | (31,980 | ) |
Balance as of September 30, 2018 | $ | 24,841 |
|
Litigation and Related ContingenciesWe have certain contingencies resulting from litigation, claims and other commitments and are subject to a variety of environmental and pollution control laws and regulations incident to the ordinary course of business. We currently expect that the resolution of such contingencies will not materially affect our financial position, results of operations or cash flows.
Stockholders' Equity
Treasury Stock
On October 25, 2018, our Board of Directors authorized a stock repurchase program under which we may purchase up to $500 million of our common stock from time to time through October 25, 2021. Repurchases under the program may be made in the open market or in privately negotiated transactions, with the amount and timing of repurchases depending on market conditions and corporate needs. The repurchase program does not obligate us to acquire any specific number of shares and may be suspended or discontinued at any time. Delaware law imposes restrictions on stock repurchases. During the nine months ended September 30, 2019, we repurchased 10.9 million shares of common stock for an aggregate price of $292 million. During 2018, we repurchased 2.3 million shares of common stock for an aggregate price of $60 million. As of September 30, 2019, there was $148 million of remaining capacity under our repurchase program. Repurchased shares are accounted for as treasury stock using the cost method.
On October 25, 2019, our Board of Directors authorized an increase to our existing stock repurchase program under which the Company may purchase up to an additional $500 million of our common stock from time to time through October 25, 2022; this extended date also applies to the original repurchase program. With the increase, the Board of Directors has authorized a total of $1.0 billion of common stock repurchases. As of the date of this filing, there was $648 million of remaining capacity under our repurchase program, with the additional $500 million authorization.
NoncontrollingInterest
In July 2019, we purchased substantially all of the noncontrolling interest of a subsidiary acquired in connection with the Stahlgruber acquisition for a purchase price of $19 million, which included the issuance of $14 million of notes payable. This purchase resulted in a net decrease to Noncontrolling interest of $10 million and a decrease to Additional paid-in capital of $9 million in our unaudited condensed consolidated financial statements as of September 30, 2019.
Recent Accounting Pronouncements
Adoption of New RevenueLease Standard
In May 2014,February 2016, 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"), which represents the FASB Accounting Standard Codification Topic 842 ("ASC 842"), to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheetUnaudited Condensed Consolidated Balance Sheets and disclosing key information about leasing arrangements. The main difference between current GAAPthe prior standard 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. Thethe prior standard.
We adopted the standard requires that entities applyin the effectsfirst quarter of these changes2019 using athe modified retrospective approach and took advantage of the transition package of practical expedients permitted within the new standard, which, includesamong other things, allows us to carryforward the historical lease classification. For leases with a numberterm of optional practical expedients. While12 months or less, we are stillelected the short-term lease exemption, which allowed us to not recognize right-of-use assets or lease liabilities for qualifying leases existing at transition and new leases we may enter into in the processfuture. Additionally, we adopted the practical expedient to combine lease and non-lease components.
As of quantifyingJanuary 1, 2019, we recorded both an operating lease asset and operating lease liability of $1.3 billion. The preexisting deferred rent liability balances from the impact thathistorical straight-line treatment of operating leases was reclassified as a reduction of the lease asset upon adoption. The adoption of ASU 2016-02 will have on our consolidated financial statements and related disclosures, we anticipate the adoption willstandard did not materially affect our consolidated balance sheetUnaudited Condensed Consolidated Statements of Income or Statements of Cash Flows as operating lease payments will still be an operating cash outflow and disclosures, as the majority of our operating leasescapital lease payments will still be recorded on the balance sheet under ASU 2016-02. While we doa financing cash outflow. The new standard did 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 changeliquidity. The standard will have no impact on our debt covenant compliance under our current agreements 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 withcovenant calculations are based on the implementation of the new software with an expectation to complete the implementation by the end of 2018. prior lease accounting rules.
Other Recently Adopted Accounting Pronouncements
During the secondfirst quarter of 2019, 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 issuedadopted 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 adoptWe adopted 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 theThe adoption of ASU 2017-12 did not have a material impact of this standard on our unaudited condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-13, "Disclosure Framework-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 currently believe that it will have a material impact.
In August 2018,June 2016, the FASB issued ASU No. 2018-14, "Disclosure Framework- Changes2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), and in November 2018 issued a subsequent amendment, ASU 2018-19, "Codification Improvements to the Disclosure Requirements for Defined Benefit Plans"Topic 326, Financial Instruments - Credit Losses" ("ASU 2018-14"2018-19"), which removes, modifies,. ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and adds certain disclosure requirementsother instruments that are not measured at fair value through net income. ASU 2016-13 will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. ASU 2018-19 will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope of this amendment that represent the contractual right to ASC 715-20.receive cash. ASU 2018-142016-13 and ASU 2018-19 should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. ASU 2016-13 is effective for fiscal years and interimannual periods beginning after December 15, 2020; early2019, and interim periods therein. Early adoption is permitted.permitted for annual periods beginning after December 15, 2018, and interim periods therein. We are in the process ofcurrently evaluating the impact of the adoption of this standard on our disclosures.consolidated financial statements.
Note 5. Revenue Recognition
The core principle of ASC 606is 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, weWe recognize revenue when the products are shipped to, delivered to or picked up by customers, andwhich is the point when title has transferred.
transferred and risk of ownership has passed.
Sources of Revenue
We report our revenue in two categories: (i) parts and services and (ii) other. The following table sets forth our revenue by category, with our parts and services revenue further disaggregated by reportable segment (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
North America | $ | 1,145,402 |
| | $ | 1,109,067 |
| | $ | 3,466,582 |
| | $ | 3,447,074 |
|
Europe | 1,446,392 |
| | 1,464,049 |
| | 4,398,185 |
| | 3,781,091 |
|
Specialty | 394,204 |
| | 388,865 |
| | 1,157,023 |
| | 1,151,172 |
|
Parts and services | 2,985,998 |
| | 2,961,981 |
| | 9,021,790 |
| | 8,379,337 |
|
Other | 161,775 |
| | 160,397 |
| | 474,459 |
| | 494,556 |
|
Total revenue | $ | 3,147,773 |
| | $ | 3,122,378 |
| | $ | 9,496,249 |
| | $ | 8,873,893 |
|
|
| | | | | | | | | | | | | | | |
| 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 |
|
Total revenue | $ | 3,122,378 |
| | $ | 2,465,800 |
| | $ | 8,873,893 |
| | $ | 7,267,054 |
|
Parts and Services
Our parts revenue is generated from the sale of vehicle products including replacement parts, components and systems used in the repair and maintenance of vehicles and specialty products and accessories to improve the performance, functionality and appearance of vehicles. Services revenue includes (i) additional services that are generally billed concurrently with the related product sales, such as the sale of service-type warranties, and(ii) fees for admission to our self service yards.yards, and (iii) diagnostic and repair services.
In North America, our vehicle replacement products include sheet metal collision parts such as doors, hoods, and fenders; bumper covers; head and tail lamps; automotive glass products such as windshields; mirrors and grilles; wheels; and large mechanical items such as engines and transmissions. In Europe, our products include a wide variety of small mechanical products such as brake pads, discs and sensors; clutches; electrical products such as spark plugs and batteries; steering and suspension products; filters; and oil and automotive fluids. In our Specialty operations, we serve six product segments: truck and off-road; speed and performance; RV; towing; wheels, tires and performance handling; and miscellaneous accessories.
Our service-type warranties typically have service periods ranging from 6 months to 36 months. Under FASB Accounting Standards Codification Topic 606 ("ASC 606,606"), proceeds from these service-type warranties are deferred at contract inception and amortized on a straight-line basis to revenue over the contract period. The changes in deferred service-type warranty revenue are as follows (in thousands):
|
| | | |
Balance as of January 1, 2019 | $ | 24,006 |
|
Additional warranty revenue deferred | 32,118 |
|
Warranty revenue recognized | (29,469 | ) |
Balance as of September 30, 2019 | $ | 26,655 |
|
|
| | | |
Balance as of January 1, 2018 | $ | 19,465 |
|
Additional warranty revenue deferred | 28,889 |
|
Warranty revenue recognized | (25,200 | ) |
Balance as of September 30, 2018 | $ | 23,154 |
|
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 OEMsoriginal equipment manufacturers ("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 16, "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 606we 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 estimatesconsideration, with contemplation of variable
consideration are constrained to the extent that a significant reversalany expected reversals in revenue is expected.revenue. We recorded a refund liability and return asset for expected returns of $107$100 million and $57
$54 million, respectively, as of September 30, 20182019, and a net reserve of $38$105 million and $56 million, respectively, as of December 31, 2017.2018. The refund liability is presented separately on the balance sheet within current liabilities while the return asset is presented within prepaidPrepaid expenses and other current assets. Other types of variable consideration consist primarily of discounts, volume rebates, and other customer sales incentives which are recorded in Receivables, net on the Unaudited Condensed Consolidated Balance Sheets. We recorded a reserve for our variable consideration of $114$106 million and $78$103 million as of September 30, 20182019 and December 31, 2017,2018, respectively. While other customer incentive programs exist, we characterize them as material rights in the context of our sales transactions. We consider these programs to be immaterial to our unaudited condensed consolidated financial statements.
Note 6. Restructuring and Acquisition Related Expenses
Acquisition Related Expenses
Acquisition related expenses, which include external costs such as legal, accounting and advisory fees, totaled $1were $2 million and $17 million forin each of the three and nine months ended September 30, 2018, respectively. Our 2018 expenses primarily consisted of external costs related to our acquisition of Stahlgruber totaling $1 million and $15 million for the three and nine months ended September 30, 2018, respectively. The remaining acquisition related costs related to (i) completed acquisitions, (ii) pending acquisitions as of September 30, 2018, and (iii) potential acquisitions that were terminated. 2019.
Acquisition related expenses for the three and nine months ended September 30, 2017 totaled $32018 were $1 million and $8$17 million, respectively. Our 2017 expensesrespectively, which included external costs primarily related to completed acquisitionsour May 2018 acquisition of Stahlgruber.
Acquisition Integration Plans
During the three and acquisitions that were pending as ofnine months ended September 30, 2017.2019, we incurred $7 million and $13 million of restructuring expenses, respectively, primarily related to our acquisition integration efforts in our Europe segment. These expenses included approximately $4 million and $7 million for the three and nine months ended September 30, 2019, respectively, related to the integration of our acquisition of Andrew Page Limited ("Andrew Page"). The $4 million recorded during the three months ended September 30, 2019 for Andrew Page was recorded within Cost of goods sold in the Unaudited Condensed Consolidated Statement of Income.
Acquisition Integration Plans and Restructuring
During the three and nine months ended September 30, 2018, we incurred $5 million and $10 million of restructuring expenses, respectively. Restructuring expenses for the three months ended September 30, 2018 primarily consisted of $4 million related to the integration of our acquisition of Andrew Page and $1 million related to our Specialty segment; restructuring expenses for the nine months ended September 30, 2018 primarily consisted of $8 million related to the integration of our acquisition of Andrew Page and $2 million related to our Specialty segment. These integration activities included the closure of duplicate facilities and termination of employees.
During each of the three and nine months ended September 30, 2017, we incurred $2 million of restructuring expenses, primarily related to the ongoing integration activities in our Specialty segment. Expenses incurred were primarily related to facility closures 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 and 2019.operations. 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 currently expected to be less thanbetween $5 million and $10 million.
2019 Global Restructuring Program
In the second quarter of 2019, we began implementing a cost reduction initiative, covering all three of our reportable segments, designed to eliminate underperforming assets and cost inefficiencies. We have incurred and expect to incur costs for inventory write-downs, employee severance and other expenditures related to employee terminations; lease exit costs, such as lease termination fees, accelerated amortization of operating lease assets and impairment of operating lease assets; other costs related to facility exits, such as moving expenses to relocate inventory and equipment; and accelerated depreciation of fixed assets to be disposed earlier than the end of the previously estimated use lives.
During the three and nine months ended September 30, 2019, we incurred $18 million and $23 million, respectively, of restructuring expenses primarily related to inventory write-downs, facility exit costs, and employee-related costs. Of these expenses, $13 million, primarily related to Andrew Page branch consolidation and brand rationalization, was recorded within Cost of goods sold in the Unaudited Condensed Consolidated Statement of Income during each of the three and nine months ended September 30, 2019, and $4 million and $10 million, respectively, was recorded within Restructuring and acquisition related expenses. We currently expect to incur additional expenses between $15 million and $20 million through the end of 2020 to complete the program.
1 LKQ Europe Program
In September 2019, we announced a multi-year program called "1 LKQ Europe" which is intended to create structural centralization and standardization of key functions to facilitate the operation of the Europe segment as a single business. Under the 1 LKQ Europe program, we will reorganize our non-customer-facing teams and support systems through various projects including the implementation of a common ERP platform, rationalization of our product portfolio, and creation of a Europe headquarters office and central back office. We currently expect to incur between $45 million and $55 million in personnel and inventory related restructuring charges through 2024 as a result of executing the 1 LKQ Europe program. In future periods, we
may identify additional initiatives and projects under the 1 LKQ Europe program that may result in additional restructuring expense, although we are currently unable to estimate the range of charges for such potential future initiatives and projects.
Note 7. 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 unitsequity-based awards under the LKQ Corporation 1998 Equity Incentive Plan (the “Equity Incentive Plan”). We have granted RSUs,restricted stock units ("RSUs"), stock options, and restricted stock under the Equity Incentive Plan. We expect to issue new or treasury shares of common stock to cover past and future equity grants.
RSUs
The RSUs we have issued vest over periods of up to five years, subject to a continued service condition. Currently outstanding RSUs (other than PSUs, which are described below) contain either a time-based vesting condition or a combination of a performance-based vesting condition and a time-based vesting condition, in which case both conditions must be met before any RSUs vest. For 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. Our 2019 annual grant of RSUs occurred in March 2019. In previous years, the annual grant occurred in mid-January.
Starting with our 2019 grants, participants who are eligible for retirement (defined as a voluntary separation of service from the Company after the participant has attained at least 60 years of age and completed at least five years of service) will continue to vest in their awards; if retirement occurs during the first year of the vesting period (for RSUs subject to a time-based vesting condition) or the first year of the performance period (for RSUs with a performance-based vesting condition), the participant vests in a prorated amount of the RSU grant based on the portion of the year employed. For our RSU grants prior to 2019, participants forfeit their unvested shares upon retirement.
The fair value of RSUs that vested during the nine months ended September 30, 20182019 was $27 million.
$20 million; the fair value of RSUs vested is based on the market price of LKQ stock on the date vested.
The following table summarizes activity related to our RSUs under the Equity Incentive Plan for the nine months ended September 30, 2018:2019:
|
| | | | | | | | | | | | |
| 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, 2019 | 1,475,682 |
| | $ | 34.94 |
| | | | |
Granted | 1,011,623 |
| | $ | 27.82 |
| | | | |
Vested | (753,276 | ) | | $ | 32.31 |
| | | | |
Forfeited / Canceled | (70,851 | ) | | $ | 33.56 |
| | | | |
Unvested as of September 30, 2019 | 1,663,178 |
| | $ | 31.86 |
| | | | |
Expected to vest after September 30, 2019 | 1,506,308 |
| | $ | 31.90 |
| | 2.7 | | $ | 47,373 |
|
|
| | | | | | | | | | | | |
| 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 | 601,802 |
| | $ | 42.58 |
| | | | |
Vested | (698,903 | ) | | $ | 30.07 |
| | | | |
Forfeited / Canceled | (33,767 | ) | | $ | 33.28 |
| | | | |
Unvested as of September 30, 2018 | 1,493,522 |
| | $ | 34.89 |
| | | | |
Expected to vest after September 30, 2018 | 1,344,519 |
| | $ | 34.88 |
| | 2.6 | | $ | 42,581 |
|
(1) | |
(1) | The aggregate intrinsic value of expected to vest RSUs represents the total pretax intrinsic value (the fair value of the Company's stock on the last day of each period multiplied by the number of units) that would have been received by the holders had all RSUs vested. This amount changes based on the market price of the Company’s common stock. |
In 2019, we granted performance-based three-year RSUs ("PSUs") to certain employees, including our executive officers, under our Equity Incentive Plan. As these awards are performance-based, the exact number of shares to be paid out may be up to twice the grant amount, depending on the Company's stockperformance and the achievement of certain performance metrics (adjusted earnings per share, average organic parts and services revenue growth, and average return on invested capital) over the last daythree year period ending December 31, 2021. In 2019, we also granted an immaterial amount of each period multiplied byperformance-based RSUs to employees that have different performance metrics than those described above.
The following table summarizes activity related to our PSUs under the number of units) that would have been received byEquity Incentive Plan for the holders had all RSUs vested. This amount changes based on the market price of the Company’s common stock.nine months ended September 30, 2019:
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| | | | | | | | | | | | |
| 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, 2019 | — |
| | $ | — |
| | | | |
Granted (2) | 136,170 |
| | $ | 27.69 |
| | | | |
Unvested as of September 30, 2019 | 136,170 |
| | $ | 27.69 |
| | | | |
Expected to vest after September 30, 2019 | 136,170 |
| | $ | 27.69 |
| | 2.5 | | $ | 4,283 |
|
| |
(1) | The aggregate intrinsic value of expected to vest PSUs represents the total pretax intrinsic value (the fair value of the Company's stock on the last day of each period multiplied by the number of units at target) that would have been received by the holders had all PSUs vested. This amount changes based on the market price of the Company’s common stock and the achievement of the performance metrics relative to the established targets. |
| |
(2) | Represents the number of PSUs at target payout. |
Stock Options
Stock options vest over periods of up to five years, subject to a continued service condition. Stock options expire either six years or ten years from the date they are granted. NoNaN options were granted during the nine months ended September 30, 2018. No2019. NaN options vested during the nine months ended September 30, 2018;2019; 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 nine months ended September 30, 2018:2019:
|
| | | | | | | | | | | | |
| Number Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) (1) |
Balance as of January 1, 2019 | 1,051,494 |
| | $ | 10.15 |
| | | | |
Exercised | (605,591 | ) | | $ | 9.03 |
| | | | $ | 12,085 |
|
Canceled | (8,055 | ) | | $ | 18.45 |
| | | | |
Balance as of September 30, 2019 | 437,848 |
| | $ | 11.55 |
| | 0.3 | | $ | 8,739 |
|
Exercisable as of September 30, 2019 | 437,848 |
| | $ | 11.55 |
| | 0.3 | | $ | 8,739 |
|
|
| | | | | | | | | | | | |
| 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 | (441,495 | ) | | $ | 8.54 |
| | | | $ | 12,678 |
|
Canceled | (509 | ) | | $ | 32.31 |
| | | | |
Balance as of September 30, 2018 | 1,296,069 |
| | $ | 9.42 |
| | 1.0 | | $ | 28,862 |
|
Exercisable as of September 30, 2018 | 1,296,069 |
| | $ | 9.42 |
| | 1.0 | | $ | 28,862 |
|
(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.
| |
(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
Pre-tax stock-based compensation expense for RSUs and PSUs totaled $7 million and $21 million for the three and nine months ended September 30, 2019, respectively, and $6 million and $18 million for the three and nine months ended September 30, 2018, respectively, and $5 million and $18 million for the three and nine months ended September 30, 2017, respectively. As of September 30, 2018,2019, unrecognized compensation expense related to unvested RSUs is $40and PSUs was $44 million. Stock-based compensation expense related to these awards will be different to the extent that forfeitures are realized.realized and performance under the PSUs differs from target.
Note 8. Earnings Per Share
The following chart sets forth the computation of earnings per share (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Income from continuing operations | $ | 151,812 |
| | $ | 134,480 |
| | $ | 402,582 |
| | $ | 445,109 |
|
Denominator for basic earnings per share—Weighted-average shares outstanding | 307,230 |
| | 318,082 |
| | 311,360 |
| | 313,417 |
|
Effect of dilutive securities: | | | | | | | |
RSUs | 293 |
| | 333 |
| | 341 |
| | 452 |
|
PSUs | — |
| | — |
| | — |
| | — |
|
Stock options | 437 |
| | 987 |
| | 503 |
| | 1,082 |
|
Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding | 307,960 |
| | 319,402 |
| | 312,204 |
| | 314,951 |
|
Basic earnings per share from continuing operations | $ | 0.49 |
| | $ | 0.42 |
| | $ | 1.29 |
| | $ | 1.42 |
|
Diluted earnings per share from continuing operations (1) | $ | 0.49 |
| | $ | 0.42 |
| | $ | 1.29 |
| | $ | 1.41 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Income from continuing operations | $ | 134,480 |
| | $ | 122,381 |
| | $ | 445,109 |
| | $ | 414,104 |
|
Denominator for basic earnings per share—Weighted-average shares outstanding | 318,082 |
| | 308,909 |
| | 313,417 |
| | 308,451 |
|
Effect of dilutive securities: | | | | | | | |
RSUs | 333 |
| | 485 |
| | 452 |
| | 501 |
|
Stock options | 987 |
| | 1,385 |
| | 1,082 |
| | 1,543 |
|
Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding | 319,402 |
| | 310,779 |
| | 314,951 |
| | 310,495 |
|
Basic earnings per share from continuing operations | $ | 0.42 |
| | $ | 0.40 |
| | $ | 1.42 |
| | $ | 1.34 |
|
Diluted earnings per share from continuing operations | $ | 0.42 |
| | $ | 0.39 |
| | $ | 1.41 |
| | $ | 1.33 |
|
| |
(1) | Diluted earnings per share from continuing operations was computed using the treasury stock method for dilutive securities. |
The following table sets forth the number of employee stock-based compensation awards outstanding but not included in the computation of diluted earnings per share because their effect would have been antidilutive for the three and nine months ended September 30, 20182019 and 20172018 (in thousands):
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Antidilutive securities: | | | | | | | |
RSUs | 942 |
| | 375 |
| | 700 |
| | 317 |
|
Stock options | 31 |
| | — |
| | 32 |
| | — |
|
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Antidilutive securities: | | | | | | | |
RSUs | 375 |
| | — |
| | 317 |
| | 50 |
|
Stock options | — |
| | — |
| | — |
| | 51 |
|
Note 9. Accumulated Other Comprehensive Income (Loss)
The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, 2019 |
| | Foreign Currency Translation | | Unrealized Gain (Loss) on Cash Flow Hedges | | Unrealized (Loss) Gain on Pension Plans | | Other Comprehensive (Loss) Income from Unconsolidated Subsidiaries | | Accumulated Other Comprehensive (Loss) Income |
Beginning balance | | $ | (181,890 | ) | | $ | 5,987 |
| | $ | (7,856 | ) | | $ | (4,794 | ) | | $ | (188,553 | ) |
Pretax (loss) income | | (69,440 | ) | | 28,594 |
| | (3,087 | ) | | — |
| | (43,933 | ) |
Income tax effect | | — |
| | (6,739 | ) | | 782 |
| | — |
| | (5,957 | ) |
Reclassification of unrealized (gain) loss | | — |
| | (30,256 | ) | | (61 | ) | | — |
| | (30,317 | ) |
Reclassification of deferred income taxes | | — |
| | 7,140 |
| | 13 |
| | — |
| | 7,153 |
|
Disposal of business | | (379 | ) | | — |
| | — |
| | — |
| | (379 | ) |
Other comprehensive income from unconsolidated subsidiaries | | — |
| | — |
| | — |
| | 1,240 |
| | 1,240 |
|
Ending balance | | $ | (251,709 | ) | | $ | 4,726 |
| | $ | (10,209 | ) | | $ | (3,554 | ) | | $ | (260,746 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, 2018 |
| | Foreign Currency Translation | | Unrealized Gain (Loss) on Cash Flow Hedges | | Unrealized (Loss) Gain on Pension Plans | | Other Comprehensive Income from Unconsolidated Subsidiaries | | Accumulated Other Comprehensive (Loss) Income |
Beginning balance | | $ | (125,753 | ) | | $ | 19,684 |
| | $ | (10,200 | ) | | $ | 208 |
| | $ | (116,061 | ) |
Pretax (loss) income | | (23,405 | ) | | 7,681 |
| | 1,217 |
| | — |
| | (14,507 | ) |
Income tax effect | | 2,454 |
| | (1,796 | ) | | 41 |
| | — |
| | 699 |
|
Reclassification of unrealized (gain) loss | | — |
| | (7,284 | ) | | 21 |
| | — |
| | (7,263 | ) |
Reclassification of deferred income taxes | | — |
| | 1,703 |
| | (5 | ) | | — |
| | 1,698 |
|
Other comprehensive income from unconsolidated subsidiaries | | — |
| | — |
| | — |
| | 643 |
| | 643 |
|
Ending balance | | $ | (146,704 | ) | | $ | 19,988 |
| | $ | (8,926 | ) | | $ | 851 |
| | $ | (134,791 | ) |
| | | | Three Months Ended | | Three Months Ended |
| | September 30, 2017 | | September 30, 2018 |
| | 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 | | Foreign Currency Translation | | Unrealized Gain (Loss) on Cash Flow Hedges | | Unrealized (Loss) Gain on Pension Plans | | Other Comprehensive Income from Unconsolidated Subsidiaries | | Accumulated Other Comprehensive (Loss) Income |
Beginning balance | | $ | (157,353 | ) | | $ | 10,324 |
| | $ | (6,640 | ) | | $ | (601 | ) | | $ | (154,270 | ) | | $ | (125,753 | ) | | $ | 19,684 |
| | $ | (10,200 | ) | | $ | 208 |
| | $ | (116,061 | ) |
Pretax income (loss) | | 63,769 |
| | (15,402 | ) | | — |
| | — |
| | 48,367 |
| |
Pretax (loss) income | | | (23,405 | ) | | 7,681 |
| | 1,217 |
| | — |
| | (14,507 | ) |
Income tax effect | | (4,151 | ) | | 5,683 |
| | — |
| | — |
| | 1,532 |
| | 2,454 |
| | (1,796 | ) | | 41 |
| | — |
| | 699 |
|
Reclassification of unrealized loss (gain) | | — |
| | 12,591 |
| | (200 | ) | | — |
| | 12,391 |
| |
Reclassification of unrealized (gain) loss | | | — |
| | (7,284 | ) | | 21 |
| | — |
| | (7,263 | ) |
Reclassification of deferred income taxes | | — |
| | (4,648 | ) | | 50 |
| | — |
| | (4,598 | ) | | — |
| | 1,703 |
| | (5 | ) | | — |
| | 1,698 |
|
Other comprehensive loss from unconsolidated subsidiaries | | — |
| | — |
| | — |
| | (1,034 | ) | | (1,034 | ) | |
Other comprehensive income from unconsolidated subsidiaries | | | — |
| | — |
| | — |
| | 643 |
| | 643 |
|
Ending balance | | $ | (97,735 | ) | | $ | 8,548 |
| | $ | (6,790 | ) | | $ | (1,635 | ) | | $ | (97,612 | ) | | $ | (146,704 | ) | | $ | 19,988 |
| | $ | (8,926 | ) | | $ | 851 |
| | $ | (134,791 | ) |
| | | | Nine Months Ended | | Nine Months Ended |
| | September 30, 2018 | | September 30, 2019 |
| | Foreign Currency Translation | | Unrealized Gain (Loss) on Cash Flow Hedges | | Unrealized (Loss) Gain on Pension Plans | | Other Comprehensive (Loss) Income from Unconsolidated Subsidiaries | | Accumulated Other Comprehensive (Loss) Income | | Foreign Currency Translation | | Unrealized Gain (Loss) on Cash Flow Hedges | | Unrealized (Loss) Gain on Pension Plans | | Other Comprehensive (Loss) Income from Unconsolidated Subsidiaries | | Accumulated Other Comprehensive (Loss) Income |
Beginning balance | | $ | (71,933 | ) | | $ | 11,538 |
| | $ | (8,772 | ) | | $ | (1,309 | ) | | $ | (70,476 | ) | | $ | (177,597 | ) | | $ | 14,374 |
| | $ | (8,075 | ) | | $ | (3,652 | ) | | $ | (174,950 | ) |
Pretax (loss) income | | (82,137 | ) | | 33,901 |
| | (102 | ) | | — |
| | (48,338 | ) | | (73,733 | ) | | 34,769 |
| | (3,087 | ) | | — |
| | (42,051 | ) |
Income tax effect | | 4,507 |
| | (7,926 | ) | | (125 | ) | | — |
| | (3,544 | ) | | — |
| | (8,163 | ) | | 782 |
| | — |
| | (7,381 | ) |
Reclassification of unrealized (gain) loss | | — |
| | (26,117 | ) | | 97 |
| | — |
| | (26,020 | ) | | — |
| | (47,431 | ) | | 229 |
| | — |
| | (47,202 | ) |
Reclassification of deferred income taxes | | — |
| | 6,106 |
| | (24 | ) | | — |
| | 6,082 |
| | — |
| | 11,177 |
| | (58 | ) | | — |
| | 11,119 |
|
Disposal of business | | | (379 | ) | | — |
| | — |
| | — |
| | (379 | ) |
Other comprehensive income from unconsolidated subsidiaries | | — |
| | — |
| | — |
| | 2,160 |
| | 2,160 |
| | — |
| | — |
| | — |
| | 98 |
| | 98 |
|
Adoption of ASU 2018-02 | | 2,859 |
| | 2,486 |
| | — |
| | — |
| | 5,345 |
| |
Ending balance | | $ | (146,704 | ) | | $ | 19,988 |
| | $ | (8,926 | ) | | $ | 851 |
| | $ | (134,791 | ) | | $ | (251,709 | ) | | $ | 4,726 |
| | $ | (10,209 | ) | | $ | (3,554 | ) | | $ | (260,746 | ) |
| | | | Nine Months Ended | | Nine Months Ended |
| | September 30, 2017 | | September 30, 2018 |
| | 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 | | Foreign Currency Translation | | Unrealized Gain (Loss) on Cash Flow Hedges | | Unrealized (Loss) Gain on Pension Plans | | Other Comprehensive (Loss) Income from Unconsolidated Subsidiaries | | Accumulated Other Comprehensive (Loss) Income |
Beginning balance | | $ | (272,529 | ) | | $ | 8,091 |
| | $ | (2,737 | ) | | $ | — |
| | $ | (267,175 | ) | | $ | (71,933 | ) | | $ | 11,538 |
| | $ | (8,772 | ) | | $ | (1,309 | ) | | $ | (70,476 | ) |
Pretax income (loss) | | 177,434 |
| | (44,749 | ) | | 112 |
| | — |
| | 132,797 |
| |
Pretax (loss) income | | | (82,137 | ) | | 33,901 |
| | (102 | ) | | — |
| | (48,338 | ) |
Income tax effect | | (4,151 | ) | | 16,463 |
| | (43 | ) | | — |
| | 12,269 |
| | 4,507 |
| | (7,926 | ) | | (125 | ) | | — |
| | (3,544 | ) |
Reclassification of unrealized loss (gain) | | — |
| | 45,551 |
| | (921 | ) | | — |
| | 44,630 |
| |
Reclassification of unrealized (gain) loss | | | — |
| | (26,117 | ) | | 97 |
| | — |
| | (26,020 | ) |
Reclassification of deferred income taxes | | — |
| | (16,808 | ) | | 235 |
| | — |
| | (16,573 | ) | | — |
| | 6,106 |
| | (24 | ) | | — |
| | 6,082 |
|
Disposal of business, net | | 1,511 |
| | — |
| | (3,436 | ) | | — |
| | (1,925 | ) | |
Other comprehensive loss from unconsolidated subsidiaries | | — |
| | — |
| | — |
| | (1,635 | ) | | (1,635 | ) | |
Other comprehensive income from unconsolidated subsidiaries | | | — |
| | — |
| | — |
| | 2,160 |
| | 2,160 |
|
Adoption of ASU 2018-02 | | | 2,859 |
| | 2,486 |
| | — |
| | — |
| | 5,345 |
|
Ending balance | | $ | (97,735 | ) | | $ | 8,548 |
| | $ | (6,790 | ) | | $ | (1,635 | ) | | $ | (97,612 | ) | | $ | (146,704 | ) | | $ | 19,988 |
| | $ | (8,926 | ) | | $ | 851 |
| | $ | (134,791 | ) |
NetThe amounts of unrealized gains and losses on our interest rate swaps totaling $2 million and $5 million wereCash Flow Hedges reclassified to Interest expense, net in our Unaudited Condensed Consolidated Statements of Income during the three and nine months ended September 30, 2018, respectively, compared to a loss of $1 million during the nine months ended September 30, 2017; the amount reclassified to Interest expense, net during the three months ended September 30, 2017 was immaterial. We also reclassified gains of $2 million to Interest expense, net related to the foreign currency forward component of our cross currency swaps during each of the three months ended September 30, 2018 and 2017, and gains of $6 million during each of the nine months ended September 30, 2018 and 2017. Alsoare as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Unrealized gains on interest rate swaps (1) (2) | $ | 1,863 |
| | $ | 2,139 |
| | $ | 6,805 |
| | $ | 4,748 |
|
Unrealized gains on foreign currency forwards (2) (3) | 3,667 |
| | 2,131 |
| | 10,829 |
| | 6,287 |
|
Unrealized gains on cross currency swaps (4) | 24,726 |
| | 3,014 |
| | 29,797 |
| | 15,082 |
|
Total | $ | 30,256 |
| | $ | 7,284 |
| | $ | 47,431 |
| | $ | 26,117 |
|
| |
(1) | Inclusive of our interest rate swap agreements and the interest rate swap component of our cross currency swaps. |
| |
(2) | Amounts reclassified to Interest expense, net of interest income in our Unaudited Condensed Consolidated Statements of Income. |
| |
(3) | Related to the foreign currency forward component of our cross currency swaps. |
| |
(4) | Amounts reclassified to Other income, net in our Unaudited Condensed Consolidated Statements of Income. These gains and losses offset the impact of the remeasurement of the underlying contracts. |
Net unrealized losses related to our cross currency swaps, wepension plans were reclassified gains of $3 million and $15 million to Other income, net in our Unaudited Condensed Consolidated Statements of Income during each of the three and nine months ended September 30, 2018, respectively, compared2019 and 2018. Our policy is to losses of $15 million and $50 million duringreclassify the three and nine months ended September 30, 2017; 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 reclassifiedtax effect from Accumulated other comprehensive income (loss) to provisionthe Provision for income taxes.taxes when the related gains and losses are released to the Unaudited Condensed Consolidated Statements of Income.
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 allowed a reclassification from Accumulated other comprehensive income (loss) 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"). 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) Incomeother comprehensive income (loss) and decrease Retained Earnings. See Note 4, "Financial Statement Information" for further information regarding the adoption of ASU 2018-02.earnings.
Note 10. Long-Term Obligations
Long-term obligations consist of the following (in thousands):
|
| | | | | | | |
| September 30, | | December 31, |
| 2019 | | 2018 |
Senior secured credit agreement: | | | |
Term loans payable | $ | 343,438 |
| | $ | 350,000 |
|
Revolving credit facilities | 1,145,781 |
| | 1,387,177 |
|
U.S. Notes (2023) | 600,000 |
| | 600,000 |
|
Euro Notes (2024) | 544,950 |
| | 573,350 |
|
Euro Notes (2026/28) | 1,089,900 |
| | 1,146,700 |
|
Receivables securitization facility | — |
| | 110,000 |
|
Notes payable through October 2030 at weighted average interest rates of 2.9% and 2.0%, respectively | 34,325 |
| | 23,056 |
|
Finance lease obligations | 39,113 |
| | 39,966 |
|
Other debt at weighted average interest rates of 1.9% and 1.8%, respectively | 99,215 |
| | 117,448 |
|
Total debt | 3,896,722 |
| | 4,347,697 |
|
Less: long-term debt issuance costs | (31,184 | ) | | (36,906 | ) |
Less: current debt issuance costs | (283 | ) | | (291 | ) |
Total debt, net of debt issuance costs | 3,865,255 |
| | 4,310,500 |
|
Less: current maturities, net of debt issuance costs | (128,143 | ) | | (121,826 | ) |
Long term debt, net of debt issuance costs | $ | 3,737,112 |
| | $ | 4,188,674 |
|
|
| | | | | | | |
| September 30, | | December 31, |
| 2018 | | 2017 |
Senior secured credit agreement: | | | |
Term loans payable | $ | 590,000 |
| | $ | 704,800 |
|
Revolving credit facilities | 1,183,626 |
| | 1,283,551 |
|
U.S. Notes (2023) | 600,000 |
| | 600,000 |
|
Euro Notes (2024) | 580,200 |
| | 600,150 |
|
Euro Notes (2026/28) | 1,160,400 |
| | — |
|
Receivables securitization facility | 100,000 |
| | 100,000 |
|
Notes payable through May 2027 at weighted average interest rates of 1.5% and 1.4%, respectively | 38,641 |
| | 29,146 |
|
Other long-term debt at weighted average interest rates of 2.2% and 1.7%, respectively | 151,502 |
| | 110,633 |
|
Total debt | 4,404,369 |
| | 3,428,280 |
|
Less: long-term debt issuance costs | (31,251 | ) | | (21,476 | ) |
Less: current debt issuance costs | (4,616 | ) | | (2,824 | ) |
Total debt, net of debt issuance costs | 4,368,502 |
| | 3,403,980 |
|
Less: current maturities, net of debt issuance costs | (118,365 | ) | | (126,360 | ) |
Long term debt, net of debt issuance costs | $ | 4,250,137 |
| | $ | 3,277,620 |
|
Senior Secured Credit Agreement
On December 1, 2017,November 20, 2018, LKQ Corporation, LKQ Delaware LLP, and certain other subsidiaries (collectively, the "Borrowers") entered into Amendment No. 23 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$2.75 billion to $2.75$3.15 billion; (3) increase(2) reduce the permitted netmargin on borrowings by 25 basis points at the September 30, 2018 leverage ratio, thresholds, including a temporary step-up inand reduce the allowable netnumber of leverage ratio inpricing tiers; (3) extend the case of permitted acquisitions;maturity date by one year to January 29, 2024; (4) modifyreduce the applicable margins and fees in the pricing grid;unused facility fee depending on leverage category; (5) increase the capacity for incurring additional indebtedness under our receivables securitization facility; (6) increase the maximum borrowing limit of swingline loans and add the ability of LKQto borrow in British Pounds and its subsidiaries to incur additional indebtedness;Euros; and (6)(7) make other immaterial or clarifying modifications and amendments. The increase inamendments to the revolving credit facility's multicurrency componentterms of $300 millionthe Credit Agreement. Borrowings will be used for general corporate purposes.continue to bear interest at variable rates.
Amounts under the revolving credit facility are due and payable upon maturity of the Credit Agreement on January 29, 2023.2024. Term loan borrowings, which totaled $590$343 million as of September 30, 2018,2019, are due and payable in quarterly installments equal to $9$2 million on the last day of each of the first four fiscal quarters ending on or after March 31, 2019 and approximately $4 million on the last day of each fiscal quarter ending on or after December 31, 2021,thereafter, with the remaining balance due and payable on January 29, 2023. During2024.
The increase in the three months ended September 30, 2018, we prepaid our required quarterly installments through September 30, 2021.
revolving credit facility's multicurrency component of $400 million was used in part to pay down $240 million of the term loan (to the new $350 million amount that was outstanding as of the date of the amendment); the remainder will be used for general corporate purposes.
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 September 30, 20182019 and December 31, 2017 was 2.2%.2018 were 1.6% and 1.9%, respectively. 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, there were no borrowings$15 million classified as current maturities at September 30, 20182019 compared to $18$9 million at December 31, 2017.2018. As of September 30, 2018,2019, there were letters of credit outstanding in the aggregate amount of $65$69 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 September 30, 20182019 was $1.5$1.9 billion.
Related to the execution of Amendment No. 23 to the Fourth Amended and Restated Credit Agreement in December 2017,November 2018, we incurred $5$4 million of fees, the majority of which were capitalized as an offset to Long-Term Obligations and are amortized over the term of the agreement.
U.S. Notes (2023)
In 2013, we issued $600 million aggregate principal amount of 4.75% senior notes due 2023 (the "U.S. Notes (2023)"). The U.S. Notes (2023) 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"), the trustee, paying agent, transfer agent and registrar. 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.
The U.S. Notes (2023) are redeemable, in whole or in part, at any time on or after May 15, 2018 at the respective redemption prices specified in the U.S. Notes (2023) Indenture, plus accrued and unpaid interest, if any. We may be required to make an offer to purchase the U.S. Notes (2023) upon the sale of certain assets, subject to certain exceptions, and upon a change of control.
Euro Notes (2024)
On April 14, 2016, LKQ Italia Bondco S.p.A. (“("LKQ Italia”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"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"Euro Notes (2024) Indenture”Indenture") among LKQ Italia, LKQ Corporation and certain of our subsidiaries (the “Euro"Euro Notes (2024) Subsidiaries”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’sItalia's and each Euro Notes (2024) Guarantor’sGuarantor's senior unsecured obligations and are subordinated to all of LKQ Italia's and the Euro Notes (2024) Guarantors’Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2024) are
effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2024) to the extent of the assets of those subsidiaries. The Euro Notes (2024) have been listed on the ExtraMOT, Professional Segment of the Borsa Italia S.p.A. securities exchange and the Global Exchange Market of Euronext Dublin.
The Euro Notes (2024) are redeemable, in whole or in part, at any time at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus a "make whole" premium. On or after January 1, 2024, we may redeem some or all of the Euro Notes (2024) at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. We may be required to make an offer to purchase the Euro Notes (2024) upon the sale of certain assets, subject to certain exceptions, and upon a change of control. In addition, in the event of certain developments affecting taxation or under certain other circumstances which, in any case, require the payment of certain additional amounts, we may redeem the Euro Notes (2024) in whole, but not in part, at any time at a redemption price of 100% of the principal amount thereof plus accrued but unpaid interest, if any, and such certain additional amounts, if any, to the redemption date.
Euro Notes (2026/28)
On April 9, 2018, LKQ European Holdings B.V. ("LKQ Euro Holdings"), a wholly-owned subsidiary of LKQ Corporation, completed an offering of €1.0 billion aggregate principal amount of senior notes. The offering consisted of €750 million senior notes due 2026 (the "2026 notes") and €250 million senior notes due 2028 (the "2028 notes" and, together with the 2026 notes, the "Euro Notes (2026/28)") in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering, together with borrowings under our senior secured credit facility, were or will be used to (i) finance a portion of the consideration paid for the Stahlgruber acquisition, (ii) for general corporate purposes and (iii) to pay related fees and expenses, including the refinancing of net financial debt. The Euro Notes (2026/28) are governed by the Indenture dated as of April 9, 2018 (the “Euro Notes (2026/28) Indenture”) among LKQ Euro Holdings, LKQ Corporation and certain of our subsidiaries (the “Euro Notes (2026/28) Subsidiaries”), the trustee, paying agent, transfer agent, and registrar.
The 2026 notes and 2028 notes bear interest at 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.year. The Euro Notes (2026/28) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2026/28) Subsidiaries (the "Euro Notes (2026/28) Guarantors").
The Euro Notes (2026/28) and the related guarantees are, respectively, LKQ Euro Holdings' and each Euro Notes (2026/28) Guarantor’s senior unsecured obligations and will be subordinated to all of LKQ Euro Holdings' and the Euro Notes (2026/28) Guarantors’ existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2026/28) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2026/28) to the extent of the assets of those subsidiaries. The Euro Notes (2026/28) have been listed on the Global Exchange Market of Euronext Dublin.
The Euro Notes (2026/28) are redeemable, in whole or in part, at any time at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus a "make whole" premium. On or after April 1, 2021, we may redeem some or all of the 2026 notes at the applicable redemption prices set forth in the Euro Notes (2026/28) Indenture. On or after April 1, 2023, we may redeem some or all of the 2028 notes at the applicable redemption prices set forth in the Euro Notes (2026/28) Indenture. We also may redeem up to 35% of 2026 notes and up to 35% of the 2028 notes before April 1, 2021 with the net cash proceeds from certain equity offerings. We may be required to make an offer to purchase the Euro Notes (2026/28) upon the sale of certain assets, subject to certain exceptions, and upon a change of control. In addition, in the event of certain developments affecting taxation or under certain other circumstances which, in any case, require the payment of certain additional amounts, we may redeem the Euro Notes (2026/28) in whole, but not in part, at any time at a redemption price of 100% of the principal amount thereof, plus accrued but unpaid interest, if any, and such certain additional amounts, if any, to the redemption date.
Related to the execution of the Euro Notes (2026/28) in April 2018, we incurred $16 million of fees, which were capitalized as an offset to Long-Term Obligations and are amortized over the term of the Euro Notes (2026/28).
Receivables Securitization Facility
On November 29, 2016,December 20, 2018, we amended the terms of our receivables securitization facility with MUFG Bank, Ltd. ("MUFG") (formerly known as The Bank of Tokyo-Mitsubishi UFJ, LTD. ("BTMU"Ltd.) to: (i) extend the term of the facility to November 8, 2019;2021; (ii) increase the maximum amount available to $100$110 million; and (iii) make other clarifying and updating changes. Under the facility, LKQ sells an ownership interest in certain receivables, related collections and security interests to BTMUMUFG for the benefit of conduit investors and/or financial institutions for cash proceeds. Upon payment of the receivables by customers, rather than remitting to BTMUMUFG 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 inon our Unaudited Condensed Consolidated Balance Sheets, under which the receivables included in the program collateralize the amounts invested by BTMU,MUFG, the conduit investors and/or financial institutions (the "Purchasers"). The receivables are held by LKQ Receivables Finance Company, LLC ("LRFC"), a wholly owned bankruptcy-remote special purpose subsidiary of LKQ, and therefore, the receivables are available first to satisfy the creditors of LRFC, including the Purchasers. NetWhile there were no borrowings on our receivables totaling $127securitization facility as of September 30, 2019, $120 million and $144 millionof net receivables were available as collateral for the investment under the receivables facility, compared to $132 million as of September 30, 2018 and December 31, 2017, respectively.2018.
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 InterBankInterbank 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. AsThe outstanding balance was $110 million as of December 31, 2018 and there was 0 outstanding balance as of September 30, 2018, the interest rate under the receivables facility was based on commercial paper rates and was 3.1%. The outstanding balances of $100 million as of both September 30, 2018 and2019. At December 31, 2017 were2018, we classified the outstanding balance 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.
Note 11. 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 changesChanges in the fair value of the interest rate swap agreements isare recorded in Accumulated Other Comprehensive Income (Loss) and isare reclassified to Interest expense, net of interest expenseincome 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 September 30, 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 ofChanges in the changes in fair value of the foreign currency forward contracts isare recorded in Accumulated Other Comprehensive Income (Loss) and reclassified to otherOther 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 isare recorded in Accumulated Other Comprehensive Income (Loss) and isare reclassified to interestInterest expense, net of interest income when the underlying transactions have an impact on earnings.
In October 2018, we entered into two cross currency swap agreements for a total notional amount of $184 million (€160 million). Half of the notional amount maturesmatured in October 2019 with the remainder in October 2020. The purpose of, and accounting offor, the swaps are similar to those described in the previous paragraph.
The activity related to our cash flow hedges is presented in operating activities in our Unaudited Condensed Consolidated Statements of Cash Flows.
The following table summarizestables summarize the notional amounts and fair values of our designated cash flow hedges as of September 30, 20182019 and December 31, 20172018 (in thousands):
| | | | Notional Amount | | Fair Value at September 30, 2018 (USD) | | Fair Value at December 31, 2017 (USD) | | Notional Amount | | Fair Value at September 30, 2019 (USD) |
| | September 30, 2018 | | December 31, 2017 | | Other Assets | | Other Noncurrent Liabilities | | Other Assets | | Other Noncurrent Liabilities | | September 30, 2019 | | Other Current Assets | | Other Noncurrent Assets | | Other Accrued Expenses | | Other Noncurrent Liabilities |
Interest rate swap agreements | Interest rate swap agreements | | | | | | | | | Interest rate swap agreements | | | | | | | | |
USD denominated | | $ | 590,000 |
| | $ | 590,000 |
| | $ | 25,719 |
| | $ | — |
| | $ | 19,102 |
| | $ | — |
| | $ | 480,000 |
| | $ | — |
| | $ | 3,634 |
| | $ | — |
| | $ | — |
|
Cross currency swap agreements | Cross currency swap agreements | | | | | | | | | Cross currency swap agreements | | | | | | | | |
USD/euro | | $ | 394,649 |
| | $ | 406,546 |
| | 10,881 |
| | 49,212 |
| | 5,504 |
| | 61,492 |
| | $ | 562,418 |
| | 4,678 |
| | 5,766 |
| | 53 |
| | 14,544 |
|
Total cash flow hedges | Total cash flow hedges | | $ | 36,600 |
| | $ | 49,212 |
| | $ | 24,606 |
| | $ | 61,492 |
| Total cash flow hedges | | $ | 4,678 |
| | $ | 9,400 |
| | $ | 53 |
| | $ | 14,544 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Notional Amount | | Fair Value at December 31, 2018 (USD) |
| | December 31, 2018 | | Other Current Assets | | Other Noncurrent Assets | | Other Accrued Expenses | | Other Noncurrent Liabilities |
Interest rate swap agreements | | | | | | | | |
USD denominated | | $ | 480,000 |
| | $ | — |
| | $ | 14,967 |
| | $ | — |
| | $ | — |
|
Cross currency swap agreements | | | | | | | | |
USD/euro | | $ | 574,315 |
| | 211 |
| | 7,669 |
| | 127 |
| | 40,870 |
|
Total cash flow hedges | | $ | 211 |
| | $ | 22,636 |
| | $ | 127 |
| | $ | 40,870 |
|
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 inon our Unaudited Condensed Consolidated Balance Sheets. The impact of netting the fair values of these contracts would result in a decrease to Other Noncurrent Assets and Other Noncurrent Liabilities on our Unaudited Condensed Consolidated Balance Sheets of $19$6 million and $12$14 million at September 30, 20182019 and December 31, 2017,2018, 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 each of the three and nine months ended September 30, 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 September 30, 2018,2019, we estimate that $4$2 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
During the third quarter of 2018, we recorded the fair value of a derivative instrument of $29 million in Other assets on our Unaudited Condensed Consolidated Balance Sheets related to 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. Refer to Note 4, "Financial Statement Information," for more information on the derivative instrument.
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 September 30, 20182019 and December 31, 2017,2018, along with the effect on our results of operations during each of the three and nine months ended September 30, 20182019 and 2017,2018, were immaterial.
Note 12. Fair Value Measurements
Financial Assets and Liabilities Measured at Fair Value
We use the market and income approaches to estimate the fair value of our financial assets and liabilities, and during the three and nine months ended September 30, 2018,2019, there were no significant changes in valuation techniques or inputs related to the financial assets or liabilities that we have historically recorded at fair value. The tiers in the fair value hierarchy include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation inputs we utilized to determine such fair value as of September 30, 20182019 and December 31, 20172018 (in thousands):
| | | Balance as of September 30, 2018 | | Fair Value Measurements as of September 30, 2018 | Balance as of September 30, 2019 | | Fair Value Measurements as of September 30, 2019 |
Level 1 | | Level 2 | | Level 3 | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | | | | | |
Cash surrender value of life insurance | $ | 53,691 |
| | $ | — |
| | $ | 53,691 |
| | $ | — |
| $ | 56,278 |
| | $ | — |
| | $ | 56,278 |
| | $ | — |
|
Rights to acquire Mekonomen shares | 28,683 |
| | — |
| | 28,683 |
| | — |
| |
Interest rate swaps | 25,719 |
| | — |
| | 25,719 |
| | — |
| 3,634 |
| | — |
| | 3,634 |
| | — |
|
Cross currency swap agreements | 10,881 |
| | — |
| | 10,881 |
| | — |
| 10,444 |
| | — |
| | 10,444 |
| | — |
|
Total Assets | $ | 118,974 |
| | $ | — |
| | $ | 118,974 |
| | $ | — |
| $ | 70,356 |
| | $ | — |
| | $ | 70,356 |
| | $ | — |
|
Liabilities: | | | | | | | | | | | | | | |
Contingent consideration liabilities | $ | 5,243 |
| | $ | — |
| | $ | — |
| | $ | 5,243 |
| $ | 9,873 |
| | $ | — |
| | $ | — |
| | $ | 9,873 |
|
Deferred compensation liabilities | 54,419 |
| | — |
| | 54,419 |
| | — |
| 59,846 |
| | — |
| | 59,846 |
| | — |
|
Cross currency swap agreements | 49,212 |
| | — |
| | 49,212 |
| | — |
| 14,597 |
| | — |
| | 14,597 |
| | — |
|
Total Liabilities | $ | 108,874 |
| | $ | — |
| | $ | 103,631 |
| | $ | 5,243 |
| $ | 84,316 |
| | $ | — |
| | $ | 74,443 |
| | $ | 9,873 |
|
|
| | | | | | | | | | | | | | | |
| Balance as of December 31, 2018 | | Fair Value Measurements as of December 31, 2018 |
Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | |
Cash surrender value of life insurance | $ | 47,649 |
| | $ | — |
| | $ | 47,649 |
| | $ | — |
|
Interest rate swaps | 14,967 |
| | — |
| | 14,967 |
| | — |
|
Cross currency swap agreements | 7,880 |
| | — |
| | 7,880 |
| | — |
|
Total Assets | $ | 70,496 |
| | $ | — |
| | $ | 70,496 |
| | $ | — |
|
Liabilities: | | | | | | | |
Contingent consideration liabilities | $ | 5,209 |
| | $ | — |
| | $ | — |
| | $ | 5,209 |
|
Deferred compensation liabilities | 48,984 |
| | — |
| | 48,984 |
| | — |
|
Cross currency swap agreements | 40,997 |
| | — |
| | 40,997 |
| | — |
|
Total Liabilities | $ | 95,190 |
| | $ | — |
| | $ | 89,981 |
| | $ | 5,209 |
|
|
| | | | | | | | | | | | | | | |
| Balance as of December 31, 2017 | | Fair Value Measurements as of December 31, 2017 |
Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | |
Cash surrender value of life insurance | $ | 45,984 |
| | $ | — |
| | $ | 45,984 |
| | $ | — |
|
Interest rate swaps | 19,102 |
| | — |
| | 19,102 |
| | — |
|
Cross currency swap agreements | 5,504 |
| | — |
| | 5,504 |
| | — |
|
Total Assets | $ | 70,590 |
| | $ | — |
| | $ | 70,590 |
| | $ | — |
|
Liabilities: | | | | | | | |
Contingent consideration liabilities | $ | 2,636 |
| | $ | — |
| | $ | — |
| | $ | 2,636 |
|
Deferred compensation liabilities | 47,199 |
| | — |
| | 47,199 |
| | — |
|
Cross currency swap agreements | 61,492 |
| | — |
| | 61,492 |
| | — |
|
Total Liabilities | $ | 111,327 |
| | $ | — |
| | $ | 108,691 |
| | $ | 2,636 |
|
The cash surrender value of life insurance and the derivative instrument related to Mekonomen are bothis included in Other noncurrent assets on our Unaudited Condensed Consolidated Balance Sheets. The current portion of deferred compensation is included in Accrued payroll-related liabilities and the current portion of contingent consideration liabilities is included in Other current liabilities on our Unaudited Condensed Consolidated Balance Sheets; the noncurrent portion of these amounts is included in Other noncurrent liabilities on our Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments. The balance sheet classification of the interest rate swaps and cross currency swap agreements is presented in Note 11, "Derivative Instruments and Hedging Activities."
Our Level 2 assets and liabilities are valued using inputs from third parties and market observable data. We obtain valuation data for the cash surrender value of life insurance and deferred compensation liabilities from third party sources, which determine the net asset values for our accounts using quoted market prices, investment allocations and reportable trades. We valued the rights to acquire Mekonomen shares using the Mekonomen share price as of the last day of the period and the discounted share price under the rights issue. We value our other derivative instruments using a third party valuation model that performs a discounted cash flow analysis based on the terms of the contracts and market observable inputs such as current and forward interest rates and current and forward foreign exchange rates.
Our contingent consideration liabilities are related to our business acquisitions. Under the terms of the contingent consideration agreements, payments may be made at specified future dates depending on the performance of the acquired business subsequent to the acquisition. The liabilities for these payments are classified as Level 3 liabilities because the related fair value measurement, which is determined using an income approach, includes significant inputs not observable in the market.
Financial Assets and Liabilities Not Measured at Fair Value
Our debt is reflected on the Unaudited Condensed Consolidated Balance Sheets at cost. Based on market conditions as of both September 30, 20182019 and December 31, 2017,2018, the fair value of our credit agreement borrowings reasonably approximated the carrying values of $1.8$1.5 billion and $2.0$1.7 billion, respectively. In addition, based on market conditions, the fair valuesvalue of the outstanding borrowings under the receivables facility reasonably approximated the carrying valuesvalue of $100$110 million at bothDecember 31, 2018; as of September 30, 2018 and December 31, 2017.2019, there were no outstanding borrowings under the receivables facility. As of September 30, 20182019 and December 31, 2017,2018, the fair values of the U.S. Notes (2023) were approximately $601$609 million and $615$574 million, respectively, compared to a carrying value of $600 million.million at each date. As of September 30, 20182019 and December 31, 2017,2018, the fair values of the Euro Notes (2024) were approximately $615$618 million and $658$586 million compared to carrying values of $580$545 million and $600$573 million, respectively. As of September 30, 2019, the fair value of the Euro Notes (2026/28) was $1.2 billion compared to a carrying value of $1.1 billion; as of December 31, 2018, the fair value of the Euro Notes (2026/28) approximated the carrying value of $1.2$1.1 billion.
The fair value measurements of the borrowings under our credit agreement and receivables facility are classified as Level 2 within the fair value hierarchy since they are determined based upon significant inputs observable in the market, including interest rates on recent financing transactions with similar terms and maturities. We estimated the fair value by calculating the upfront cash payment a market participant would require at September 30, 20182019 to assume these obligations. The fair value of our U.S. Notes (2023) is classified as Level 1 within the fair value hierarchy since it is determined based upon observable market inputs including quoted market prices in an active market. The fair values of our Euro Notes (2024) and Euro Notes (2026/28) are determined based upon observable market inputs including quoted market prices in markets that are not active, and therefore are classified as Level 2 within the fair value hierarchy.
Note 13. Leases
We lease certain warehouses, distribution centers, retail stores, office space, land, vehicles and equipment.
We determine if an arrangement is a lease at inception. Operating lease right-of-use ("ROU") assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As the implicit rate for most of our leases is not readily determinable, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Upon adoption of the new lease standard, we utilized the incremental borrowing rate as of the date of adoption. We determine our incremental borrowing rate by analyzing yield curves with consideration of lease term, and country and company specific factors. The operating lease ROU asset also includes any lease prepayments and excludes lease incentives.
Many of our leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 40 years or more. For each lease, we consider whether we are reasonably certain to exercise these options to extend. Other contracts may contain termination options which we assess to determine whether we are reasonably certain not to exercise those options. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Some of our lease agreements include rental payments adjusted periodically for inflation. Most of these adjustments are considered variable lease costs. Other variable lease costs consist of certain non-lease components that are disclosed as lease costs due to our election of the practical expedient to combine lease and non-lease components and include items such as variable payments for utilities, property taxes, common area maintenance, sales taxes, and insurance.
For leases with an initial term of 12 months or less, we have not recognized an operating lease ROU asset or operating lease liability on the Unaudited Condensed Consolidated Balance Sheets; we recognize lease expense for these leases on a straight-line basis over the lease terms.
We guarantee the residual values for the majority of our vehicles. The residual values decline over the lease terms to a defined percentage of original cost. In the event the lessor does not realize the residual value when a vehicle is sold, we would be responsible for a portion of the shortfall. Similarly, if the lessor realizes more than the residual value when a vehicle is sold, we would be paid the amount realized over the residual value. Had we terminated all of our operating leases subject to these guarantees at September 30, 2019, our portion of the guaranteed residual value would have totaled approximately $71 million.
Other than the residual value guarantees associated with our vehicles discussed above, we do not have any other material residual value guarantees or restrictive covenants.
The amounts recorded on the Unaudited Condensed Consolidated Balance Sheet as of September 30, 2019 related to our lease agreements are as follows (in thousands):
|
| | | | | | |
Leases | | Classification | | September 30, 2019 |
| | | | |
Assets | | | | |
Operating lease assets, net | | Operating lease assets, net | | $ | 1,303,260 |
|
Finance lease assets, net | | Property, plant and equipment, net | | 39,504 |
|
Total leased assets | | | | $ | 1,342,764 |
|
Liabilities | | | | |
Current | | | |
|
Operating | | Current portion of operating lease liabilities | | $ | 225,572 |
|
Finance | | Current portion of long-term obligations | | 10,361 |
|
Noncurrent | | | | |
Operating | | Long-term operating lease liabilities | | 1,129,423 |
|
Finance | | Long-term obligations, excluding current portion | | 28,752 |
|
Total lease liabilities | | | | $ | 1,394,108 |
|
The components of lease expense are as follows (in thousands):
|
| | | | | | | | | | |
| | | | Three Months Ended | | Nine Months Ended |
Lease Cost | | Classification | | September 30, 2019 | | September 30, 2019 |
| | | | | | |
Operating lease cost | | Cost of goods sold | | $ | 7,265 |
| | $ | 16,977 |
|
Operating lease cost | | Selling, general and administrative expenses | | 75,371 |
| | 225,794 |
|
Short-term lease cost | | Selling, general and administrative expenses | | 3,006 |
| | 7,472 |
|
Variable lease cost | | Selling, general and administrative expenses | | 20,521 |
| | 71,711 |
|
Finance lease cost | | | | | | |
Amortization of leased assets | | Depreciation and amortization | | 2,675 |
| | 7,897 |
|
Interest on lease liabilities | | Interest expense, net of interest income | | 413 |
| | 1,266 |
|
Sublease income | | Other income, net | | (782 | ) | | (1,208 | ) |
Net lease cost | | | | $ | 108,469 |
| | $ | 329,909 |
|
The future minimum lease commitments under our noncancelable operating leases at December 31, 2018 were as follows (in thousands):
|
| | | |
Years ending December 31: | |
2019 | $ | 294,269 |
|
2020 | 256,172 |
|
2021 | 210,632 |
|
2022 | 158,763 |
|
2023 | 131,518 |
|
Thereafter | 777,165 |
|
Future Minimum Lease Payments | $ | 1,828,519 |
|
The future minimum lease commitments under our leases at September 30, 2019 are as follows (in thousands):
|
| | | | | | | | | | | |
| Operating leases | | Finance leases (1) | | Total |
Three months ending December 31, 2019 | $ | 76,438 |
| | $ | 2,904 |
| | $ | 79,342 |
|
Years ending December 31: | | | | | |
2020 | 283,138 |
| | 10,528 |
| | 293,666 |
|
2021 | 242,333 |
| | 9,105 |
| | 251,438 |
|
2022 | 192,731 |
| | 6,731 |
| | 199,462 |
|
2023 | 160,862 |
| | 2,940 |
| | 163,802 |
|
2024 | 132,269 |
| | 2,615 |
| | 134,884 |
|
Thereafter | 758,111 |
| | 15,657 |
| | 773,768 |
|
Future minimum lease payments | 1,845,882 |
| | 50,480 |
| | 1,896,362 |
|
Less: Interest | 490,887 |
| | 11,367 |
| | 502,254 |
|
Present value of lease liabilities | $ | 1,354,995 |
| | $ | 39,113 |
| | $ | 1,394,108 |
|
| |
(1) | Amounts are included in the scheduled maturities of long-term obligations in the “Liquidity and Capital Resources” section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 of this Quarterly Report on Form 10-Q. |
As of September 30, 2019, we have additional minimum operating lease payments for leases that have not yet commenced of $30 million. These operating leases will commence between October 1, 2019 and December 31, 2020 with lease terms of 1 to 20 years. Most of these leases have not commenced as the assets are in the process of being constructed. We have appropriately considered the build-to-suit and sale-leaseback guidance where appropriate on these leases. No significant build-to-suit or sale-leaseback transactions have been identified.
Other information related to leases was as follows:
|
| | | |
Lease Term and Discount Rate | | September 30, 2019 |
| | |
Weighted-average remaining lease term (years) | | |
Operating leases | | 9.6 |
|
Finance leases | | 8.6 |
|
Weighted-average discount rate | | |
Operating leases | | 5.4 | % |
Finance leases | | 4.5 | % |
|
| | | | |
| | Nine Months Ended |
Supplemental cash flows information (in thousands) | | September 30, 2019 |
| | |
Cash paid for amounts included in the measurement of lease liabilities | | |
Operating cash outflows from operating leases | | $ | 222,798 |
|
Financing cash outflows from finance leases | | 8,521 |
|
Leased assets obtained in exchange for new finance lease liabilities | | 9,639 |
|
Leased assets obtained in exchange for new operating lease liabilities | | 126,336 |
|
Note 13.14. Employee Benefit Plans
We have funded and unfunded defined benefit plans covering certain employee groups in the U.S. and various European countries. Local statutory requirements govern many of our European plans. The defined benefit plans are generally frozenmostly closed to new participants and, in some cases, existing participants no longer accrue benefits. As of September 30, 20182019 and December 31, 2017,2018, the aggregate funded status of the defined benefit plans was a liability of $111 million and $46$110 million, respectively, and is reported in Other noncurrent liabilities and Accrued payroll-related liabilities on our Unaudited Condensed Consolidated Balance Sheets. Of
On June 28, 2019, we approved an amendment to terminate our primary defined benefit plan in the liabilityU.S. (the "U.S. Plan") and freeze all related benefit accruals, effective June 30, 2019. The distribution of the U.S. Plan assets pursuant to the termination will not be made until the plan termination satisfies all regulatory requirements, which is expected to be completed in 2020. U.S. Plan participants will receive their full accrued benefits from plan assets by electing either lump sum distributions or annuity contracts with a qualifying third-party annuity provider. The resulting settlement effect of the U.S. Plan termination will be determined based on prevailing market conditions, the lump sum offer participation rate of eligible participants, the actual lump sum distributions, and annuity purchase rates at September 30, 2018, $75 million was relatedthe date of distribution. As a result, we are currently unable to our acquisitionreasonably estimate either the timing or the final amount of Stahlgrubersuch settlement charges. Based on May 30, 2018.the valuation performed as of June 28, 2019, the U.S. Plan has an underfunded status of $3 million.
Net periodic benefit expensecost for our defined benefit plans included the following components for the three and nine months ended September 30, 20182019 and 20172018 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Service cost | $ | 551 |
| | $ | 628 |
| | $ | 2,212 |
| | $ | 1,612 |
|
Interest cost | 959 |
| | 996 |
| | 2,954 |
| | 2,442 |
|
Expected return on plan assets | (455 | ) | | (720 | ) | | (1,795 | ) | | (2,220 | ) |
Amortization of actuarial (gain) loss | (61 | ) | | 21 |
| | 229 |
| | 97 |
|
Net periodic benefit cost | $ | 994 |
| | $ | 925 |
| | $ | 3,600 |
| | $ | 1,931 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Service cost | $ | 628 |
| | $ | 1,126 |
| | $ | 1,612 |
| | $ | 2,902 |
|
Interest cost | 996 |
| | 750 |
| | 2,442 |
| | 2,091 |
|
Expected return on plan assets | (720 | ) | | (507 | ) | | (2,220 | ) | | (1,059 | ) |
Amortization of prior service credit | — |
| | (71 | ) | | — |
| | (201 | ) |
Amortization of actuarial (gain) loss | 21 |
| | (129 | ) | | 97 |
| | (720 | ) |
Net periodic benefit expense | $ | 925 |
| | $ | 1,169 |
| | $ | 1,931 |
| | $ | 3,013 |
|
For the three and nine months ended September 30, 2019 and 2018, the service cost component of net periodic benefit expensecost was classified in Selling, general and administrative expenses, while the other components of net periodic benefit expensecost were classified in Other income, net in our Unaudited Condensed Consolidated Statements of Income. For the three and nine months ended September 30, 2017, all components of net periodic benefit expense were included in Selling, general, and administrative expenses in our Unaudited Condensed Consolidated Statements of Income.
During the nine months ended September 30, 2018, we contributed $12 million to our pension plans. We estimate that contributions to our pension plans during the last three months of 2018 will be $1 million.
Note 14. Commitments and Contingencies
Operating Leases
We are obligated under noncancelable operating leases for corporate office space, warehouse and distribution facilities, trucks and certain equipment.
The future minimum lease commitments under these leases at September 30, 2018 are as follows (in thousands):
|
| | | |
Three months ending December 31, 2018 | $ | 72,780 |
|
Years ending December 31: | |
2019 | 271,642 |
|
2020 | 226,936 |
|
2021 | 179,921 |
|
2022 | 144,700 |
|
2023 | 122,149 |
|
Thereafter | 689,583 |
|
Future Minimum Lease Payments | $ | 1,707,711 |
|
Litigation and Related Contingencies
We have certain contingencies resulting from litigation, claims and other commitments and are subject to a variety of environmental and pollution control laws and regulations incident to the ordinary course of business. We currently expect that the resolution of such contingencies will not materially affect our financial position, results of operations or cash flows.
Note 15. Income Taxes
At the end of each interim period, we estimate our annual effective tax rate and apply that rate to our interim earnings. We also record the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and the effects of changes in tax laws or rates, in the interim period in which they occur.
The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in state and foreign jurisdictions, permanent and temporary differences between book and taxable income, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.
Our effective income tax rate for the nine months ended September 30, 20182019 was 25.2%27.5%, compared to 33.5%25.2% for the comparable prior year period. The decreaseincrease was primarily attributable to the reduction of the U.S. federal statutory income tax rate from 35% to 21% as a result of the enactment of the Tax Act in December 2017. Partially offsetting this decrease was a 1.0% increase in the effective income tax rate as a result of the Stahlgruber acquisition, including non-deductible interest and acquisition related expenses, as well as the higher effective tax rate in Germany. The effective tax rate also reflects the impact of neta favorable discrete itemsitem of approximately $12 million and $8$10 million for the nine months ended September 30, 2018, and 2017, respectively. The net favorable discrete items are primarily composed of a $10 million favorablereflecting an adjustment to the Tax Act transition tax fortax. The increase was also partially attributable to the nine months ended September 30, 2018, as well asimpact of a favorable discrete item of approximately $4 million and $7 million for the nine months ended September 30, 2018, and 2017, respectively, for excess tax benefits from stock-based payments.payments; there were $1 million of excess tax benefits from stock-based payments for the nine months ended September 30, 2019. The year over year change infor these discrete items decreasedincreased the effective tax rate by 0.6%2.1% compared to the prior year.
Our acquisition of Stahlgruber in May 2018 contributed $98 million of deferred tax liabilities relating to intangible assets; property, plant and equipment; and reserves, including pension and other post-retirement benefit obligations.
The Tax Act introduced broad and complex changes toyear period, while remaining discrete items increased the U.S. tax code, including the aforementioned reduction in the U.S. corporate tax rate, a one-time transition tax on the historical unremitted earnings of foreign subsidiaries, and a new minimum tax on foreign earnings (Global Intangible Low-Taxed Income, “GILTI”). On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the related accounting for provisional amounts under ASC 740, "Accounting for Income Taxes."
As a result of the Tax Act, in 2017, we recognized a provisional tax liability of $51 million related to the one-time transition tax on historical foreign earnings, payable over a period of eight years. We also recorded a provisional decrease to net U.S. deferred tax liabilities of $73 million. For a description of the impact of the Tax Act for the year ended December 31, 2017, refer to Note 13, "Income Taxes" of our financial statements as of and for the year ended December 31, 2017 included in the 2017 Form 10-K. During the nine-month period ended September 30, 2018, we recorded a $10 million favorable adjustment to the provisional amount recognized in 2017 related to the transition tax. We continue to gather the information necessary to finalize the provisional amounts. Our estimates could be affected as we gain a more thorough understanding of the Tax Act from additional guidance issued by the U.S. tax authorities. Changes to the provisional estimates of the tax effect of the Tax Act will be recorded as a discrete item in the interim period the amounts are considered complete.
The Company has included the estimated 2018 impact of the GILTI Tax as a period cost and included it as part of the estimated annual effective tax rate. The 2018 estimated annual effective tax rate also includesby an immaterial amount compared to the impact of all other U.S. tax reform provisions that were effective on January 1, 2018. These estimates are subject to change as additional guidance on the tax reform provisions is issued.prior year period.
Note 16. Segment and Geographic Information
We have four4 operating segments: Wholesale – North America, Europe, Specialty and Self Service. Our Wholesale – North America and Self Service operating segments are aggregated into one1 reportable segment, North America, because they possess similar economic characteristics and have common products and services, customers, and methods of distribution. Our reportable segments are organized based on a combination of geographic areas served and type of product lines offered. The reportable segments are managed separately as each business serves different customers (i.e. geographic in the case of North America and Europe and product type in the case of Specialty) and is affected by different economic conditions. Therefore, we present three3 reportable segments: North America, Europe and Specialty.
The following tables present our financial performance by reportable segment for the periods indicated (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| North America | | Europe | | Specialty | | Eliminations | | Consolidated |
Three Months Ended September 30, 2018 | | | | | | | | | |
Revenue: | | | | | | | | | |
Third Party | $ | 1,262,657 |
| | $ | 1,470,856 |
| | $ | 388,865 |
| | $ | — |
| | $ | 3,122,378 |
|
Intersegment | 142 |
| | — |
| | 1,196 |
| | (1,338 | ) | | — |
|
Total segment revenue | $ | 1,262,799 |
| | $ | 1,470,856 |
| | $ | 390,061 |
| | $ | (1,338 | ) | | $ | 3,122,378 |
|
Segment EBITDA | $ | 154,049 |
| | $ | 129,358 |
| | $ | 42,937 |
| | $ | — |
| | $ | 326,344 |
|
Depreciation and amortization (1) | 22,151 |
| | 52,139 |
| | 7,183 |
| | — |
| | 81,473 |
|
Three Months Ended September 30, 2017 | | | | | | | | | |
Revenue: | | | | | | | | | |
Third Party | $ | 1,181,756 |
| | $ | 954,522 |
| | $ | 329,522 |
| | $ | — |
| | $ | 2,465,800 |
|
Intersegment | 187 |
| | — |
| | 1,072 |
| | (1,259 | ) | | — |
|
Total segment revenue | $ | 1,181,943 |
| | $ | 954,522 |
| | $ | 330,594 |
| | $ | (1,259 | ) | | $ | 2,465,800 |
|
Segment EBITDA | $ | 152,627 |
| | $ | 79,294 |
| | $ | 35,114 |
| | $ | — |
| | $ | 267,035 |
|
Depreciation and amortization (1) | 22,104 |
| | 32,326 |
| | 5,472 |
| | — |
| | 59,902 |
|
|
| | | | | | | | | | | | | | | | | | | |
| North America | | Europe | | Specialty | | Eliminations | | Consolidated |
Three Months Ended September 30, 2019 | | | | | | | | | |
Revenue: | | | | | | | | | |
Third Party | $ | 1,302,086 |
|
| $ | 1,451,483 |
|
| $ | 394,204 |
| | $ | — |
| | $ | 3,147,773 |
|
Intersegment | 61 |
| | — |
| | 1,110 |
| | (1,171 | ) | | — |
|
Total segment revenue | $ | 1,302,147 |
|
| $ | 1,451,483 |
|
| $ | 395,314 |
|
| $ | (1,171 | ) | | $ | 3,147,773 |
|
Segment EBITDA | $ | 166,310 |
|
| $ | 124,712 |
|
| $ | 45,464 |
| | $ | — |
| | $ | 336,486 |
|
Depreciation and amortization (1) | 23,593 |
| | 47,302 |
| | 6,983 |
| | — |
| | 77,878 |
|
Three Months Ended September 30, 2018 | | | | | | | | | |
Revenue: | | | | | | | | | |
Third Party | $ | 1,262,657 |
| | $ | 1,470,856 |
| | $ | 388,865 |
| | $ | — |
| | $ | 3,122,378 |
|
Intersegment | 142 |
| | — |
| | 1,196 |
| | (1,338 | ) | | — |
|
Total segment revenue | $ | 1,262,799 |
| | $ | 1,470,856 |
| | $ | 390,061 |
| | $ | (1,338 | ) | | $ | 3,122,378 |
|
Segment EBITDA | $ | 154,049 |
| | $ | 129,358 |
| | $ | 42,937 |
| | $ | — |
| | $ | 326,344 |
|
Depreciation and amortization (1) | 22,151 |
| | 52,139 |
| | 7,183 |
| | — |
| | 81,473 |
|
| | | North America | | Europe | | Specialty | | Eliminations | | Consolidated | North America | | Europe | | Specialty | | Eliminations | | Consolidated |
Nine Months Ended September 30, 2019 | | | | | | | | | | |
Revenue: | | | | | | | | | | |
Third Party | | $ | 3,925,962 |
| | $ | 4,413,264 |
| | $ | 1,157,023 |
| | $ | — |
| | $ | 9,496,249 |
|
Intersegment | | 260 |
| | — |
| | 3,664 |
| | (3,924 | ) | | — |
|
Total segment revenue | | $ | 3,926,222 |
| | $ | 4,413,264 |
| | $ | 1,160,687 |
| | $ | (3,924 | ) | | $ | 9,496,249 |
|
Segment EBITDA | | $ | 532,994 |
| | $ | 346,291 |
| | $ | 135,790 |
| | $ | — |
| | $ | 1,015,075 |
|
Depreciation and amortization (1) | | 68,257 |
| | 141,087 |
| | 20,895 |
| | — |
| | 230,239 |
|
Nine Months Ended September 30, 2018 | | | | | | | | | | | | | | | | | | |
Revenue: | | | | | | | | | | | | | | | | | | |
Third Party | $ | 3,927,282 |
| | $ | 3,795,439 |
| | $ | 1,151,172 |
| | $ | — |
| | $ | 8,873,893 |
| $ | 3,927,282 |
| | $ | 3,795,439 |
| | $ | 1,151,172 |
| | $ | — |
| | $ | 8,873,893 |
|
Intersegment | 526 |
| | — |
| | 3,554 |
| | (4,080 | ) | | — |
| 526 |
| | — |
| | 3,554 |
| | (4,080 | ) | | — |
|
Total segment revenue | $ | 3,927,808 |
| | $ | 3,795,439 |
| | $ | 1,154,726 |
| | $ | (4,080 | ) | | $ | 8,873,893 |
| $ | 3,927,808 |
| | $ | 3,795,439 |
| | $ | 1,154,726 |
| | $ | (4,080 | ) | | $ | 8,873,893 |
|
Segment EBITDA | $ | 506,772 |
| | $ | 315,785 |
| | $ | 140,974 |
| | $ | — |
| | $ | 963,531 |
| $ | 506,772 |
| | $ | 315,785 |
| | $ | 140,974 |
| | $ | — |
| | $ | 963,531 |
|
Depreciation and amortization (1) | 64,985 |
| | 124,697 |
| | 21,295 |
| | — |
| | 210,977 |
| 64,985 |
| | 124,697 |
| | 21,295 |
| | — |
| | 210,977 |
|
Nine Months Ended September 30, 2017 | | | | | | | | | | |
Revenue: | | | | | | | | | | |
Third Party | $ | 3,596,108 |
| | $ | 2,665,170 |
| | $ | 1,005,776 |
| | $ | — |
| | $ | 7,267,054 |
| |
Intersegment | 589 |
| | — |
| | 3,222 |
| | (3,811 | ) | | — |
| |
Total segment revenue | $ | 3,596,697 |
| | $ | 2,665,170 |
| | $ | 1,008,998 |
| | $ | (3,811 | ) | | $ | 7,267,054 |
| |
Segment EBITDA | $ | 502,494 |
| | $ | 241,537 |
| | $ | 119,133 |
| | $ | — |
| | $ | 863,164 |
| |
Depreciation and amortization (1) | 64,305 |
| | 85,809 |
| | 16,394 |
| | — |
| | 166,508 |
| |
| |
(1) | Amounts presented include depreciation and amortization expense recorded within cost of goods sold. |
(1) Amounts presented include depreciation and amortization expense recorded within cost of goods sold.
The key measure of segment profit or loss reviewed by our chief operating decision maker, who is our Chief Executive Officer, is Segment EBITDA. Segment EBITDA includes revenue and expenses that are controllable by the segment. Corporate general and administrative expenses are allocated to the segments based on usage, with shared expenses apportioned based on the segment's percentage of consolidated revenue. We calculate Segment EBITDA as EBITDA excluding restructuring and acquisition related expenses (which includes restructuring expenses recorded in Cost of goods sold), change in fair value of contingent consideration liabilities, other gains and losses related to acquisitions, equity method investments, or divestitures, and equity in losses and earnings of unconsolidated subsidiaries.subsidiaries, and impairment charges. EBITDA, which is the basis for Segment EBITDA, is calculated as net income, excludingless net income (loss) attributable to continuing and discontinued noncontrolling interest, excluding discontinued operations and discontinued noncontrolling interest, depreciation, amortization, interest (which includes gains and losses on debt extinguishment) and income tax expense.
The table below provides a reconciliation of Net Income to Segment EBITDA (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
September 30, | | September 30, |
2019 | | 2018 | | 2019 | | 2018 |
Net income | $ | 152,593 |
| | $ | 134,480 |
| | $ | 403,761 |
| | $ | 445,109 |
|
Less: net (loss) income attributable to continuing noncontrolling interest | (46 | ) | | 378 |
| | 2,321 |
| | 1,040 |
|
Less: net income attributable to discontinued noncontrolling interest | 376 |
| | — |
| | 568 |
| | — |
|
Net income attributable to LKQ stockholders | 152,263 |
| | 134,102 |
| | 400,872 |
| | 444,069 |
|
Subtract: | | | | | | | |
Net income from discontinued operations | 781 |
| | — |
| | 1,179 |
| | — |
|
Net income attributable to discontinued noncontrolling interest | (376 | ) | | — |
| | (568 | ) | | — |
|
Net income from continuing operations attributable to LKQ stockholders | 151,858 |
| | 134,102 |
| | 400,261 |
| | 444,069 |
|
Add: | | | | | | | |
Depreciation and amortization | 71,513 |
| | 76,701 |
| | 213,349 |
| | 196,322 |
|
Depreciation and amortization - cost of goods sold | 5,223 |
| | 4,772 |
| | 15,748 |
| | 14,655 |
|
Depreciation and amortization - restructuring expenses - cost of goods sold | 168 |
| | — |
| | 168 |
| | — |
|
Depreciation and amortization - restructuring expenses | 974 |
| | — |
| | 974 |
| | — |
|
Interest expense, net of interest income | 31,976 |
| | 40,860 |
| | 103,949 |
| | 107,647 |
|
Provision for income taxes | 57,747 |
| | 46,068 |
| | 165,122 |
| | 156,427 |
|
EBITDA | 319,459 |
| | 302,503 |
| | 899,571 |
| | 919,120 |
|
Subtract: | | | | | | | |
Equity in earnings (losses) of unconsolidated subsidiaries (1) | 4,232 |
| | (20,284 | ) | | (33,745 | ) | | (18,326 | ) |
Fair value gain on Mekonomen derivative instrument (1) | — |
| | 2,509 |
| | — |
| | 2,509 |
|
Gains on bargain purchase | — |
| | — |
| | — |
| | 328 |
|
Add: | | | | | | | |
Restructuring and acquisition related expenses (2) | 7,955 |
| | 6,614 |
| | 19,639 |
| | 26,546 |
|
Restructuring expenses - cost of goods sold (3) | 17,130 |
| | — |
| | 17,130 |
| | — |
|
Inventory step-up adjustment - acquisition related | — |
| | — |
| | — |
| | 403 |
|
Impairment of net assets held for sale (4) (5) | (3,601 | ) | | — |
| | 44,919 |
| | 2,438 |
|
Change in fair value of contingent consideration liabilities | (225 | ) | | (548 | ) | | 71 |
| | (465 | ) |
Segment EBITDA | $ | 336,486 |
| | $ | 326,344 |
| | $ | 1,015,075 |
| | $ | 963,531 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
2018 | | 2017 | | 2018 | | 2017 |
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 |
|
Subtract: | | | | | | | |
Net loss from discontinued operations | — |
| | — |
| | — |
| | (4,531 | ) |
Net income from continuing operations attributable to LKQ stockholders | 134,102 |
| | 122,381 |
| | 444,069 |
| | 414,104 |
|
Add: | | | | | | | |
Depreciation and amortization | 76,701 |
| | 56,877 |
| | 196,322 |
| | 159,178 |
|
Depreciation and amortization - cost of goods sold | 4,772 |
| | 3,025 |
| | 14,655 |
| | 7,330 |
|
Interest expense, net | 40,860 |
| | 25,222 |
| | 107,647 |
| | 73,806 |
|
Provision for income taxes | 46,068 |
| | 58,189 |
| | 156,427 |
| | 206,206 |
|
EBITDA | 302,503 |
| | 265,694 |
| | 919,120 |
| | 860,624 |
|
Subtract: | | | | | | | |
Equity in (losses) earnings of unconsolidated subsidiaries (1) | (20,284 | ) | | 2,673 |
| | (18,326 | ) | | 3,878 |
|
Fair value gain on Mekonomen derivative instrument (1) | 2,509 |
| | — |
| | 2,509 |
| | — |
|
Gains on bargain purchases (2) | — |
| | 913 |
| | 328 |
| | 3,990 |
|
Add: | | | | | | | |
Restructuring and acquisition related expenses (3) | 6,614 |
| | 4,922 |
| | 26,546 |
| | 10,371 |
|
Inventory step-up adjustment - acquisition related | — |
| | — |
| | 403 |
| | — |
|
Impairment of net assets held for sale | — |
| | — |
| | 2,438 |
| | — |
|
Change in fair value of contingent consideration liabilities | (548 | ) | | 5 |
| | (465 | ) | | 37 |
|
Segment EBITDA | $ | 326,344 |
| | $ | 267,035 |
| | $ | 963,531 |
| | $ | 863,164 |
|
| |
(1) | SeeRefer to "Investments in Unconsolidated Subsidiaries" in Note 4, "Financial Statement Information," for further information. |
| |
(2) | Reflects the gains on bargain purchasesExcludes $1 million of depreciation expense that is reported in Restructuring and acquisition related toexpenses in our acquisitionsUnaudited Condensed Consolidated Statements of a wholesale business in Europe and Andrew Page. See Note 2, "Business Combinations," for further information. |
| |
(3) | SeeIncome. Refer to Note 6, "Restructuring and Acquisition Related Expenses," for further information. |
| |
(3) | Refer to Note 6, "Restructuring and Acquisition Related Expenses," for further information. |
(4) Refer to "Net Assets Held for Sale" in Note 4, "Financial Statement Information," for further information.
(5) In 2018, amounts were recorded in Other income, net in our Unaudited Condensed Consolidated Statements of Income.
The following table presents capital expenditures by reportable segment (in thousands):
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
September 30, | | September 30, | September 30, | | September 30, |
2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Capital Expenditures | | | | | | | | | | | | | | |
North America | $ | 27,996 |
| | $ | 31,021 |
| | $ | 86,864 |
| | $ | 69,934 |
| $ | 29,430 |
| | $ | 27,996 |
| | $ | 83,833 |
| | $ | 86,864 |
|
Europe | 23,904 |
| | 12,119 |
| | 69,582 |
| | 55,253 |
| 30,916 |
| | 23,904 |
| | 72,333 |
| | 69,582 |
|
Specialty | 4,442 |
| | 852 |
| | 15,317 |
| | 6,752 |
| 3,937 |
| | 4,442 |
| | 9,385 |
| | 15,317 |
|
Discontinued operations | — |
| | — |
| | — |
| | 3,598 |
| |
Total capital expenditures | $ | 56,342 |
| | $ | 43,992 |
| | $ | 171,763 |
| | $ | 135,537 |
| $ | 64,283 |
| | $ | 56,342 |
| | $ | 165,551 |
| | $ | 171,763 |
|
The following table presents assets by reportable segment (in thousands):
|
| | | | | | | |
| September 30, | | December 31, |
2019 | | 2018 |
Receivables, net | | | |
North America | $ | 405,218 |
| | $ | 411,818 |
|
Europe | 705,031 |
| | 649,174 |
|
Specialty | 112,948 |
| | 93,091 |
|
Total receivables, net | 1,223,197 |
| | 1,154,083 |
|
Inventories | | | |
North America | 975,561 |
| | 1,076,306 |
|
Europe | 1,274,483 |
| | 1,410,264 |
|
Specialty | 332,144 |
| | 349,505 |
|
Total inventories | 2,582,188 |
| | 2,836,075 |
|
Property, plant and equipment, net | | | |
North America | 582,157 |
| | 570,508 |
|
Europe | 516,106 |
| | 562,600 |
|
Specialty | 85,925 |
| | 87,054 |
|
Total property, plant and equipment, net | 1,184,188 |
| | 1,220,162 |
|
Operating lease assets, net (1) | | | |
North America | 813,412 |
| | — |
|
Europe | 404,444 |
| | — |
|
Specialty | 85,404 |
| | — |
|
Total operating lease assets, net | 1,303,260 |
| | — |
|
Equity method investments | | | |
North America | 17,275 |
| | 16,404 |
|
Europe (2) | 126,734 |
| | 162,765 |
|
Total equity method investments | 144,009 |
| | 179,169 |
|
Other unallocated assets | 5,974,848 |
| | 6,003,913 |
|
Total assets | $ | 12,411,690 |
| | $ | 11,393,402 |
|
|
| | | | | | | |
| September 30, | | December 31, |
2018 | | 2017 |
Receivables, net | | | |
North America | $ | 437,429 |
| | $ | 379,666 |
|
Europe (1) | 696,106 |
| | 555,372 |
|
Specialty | 122,341 |
| | 92,068 |
|
Total receivables, net (2) | 1,255,876 |
| | 1,027,106 |
|
Inventories | | | |
North America | 1,058,310 |
| | 1,076,393 |
|
Europe (1) | 1,391,578 |
| | 964,068 |
|
Specialty | 345,006 |
| | 340,322 |
|
Total inventories | 2,794,894 |
| | 2,380,783 |
|
Property, Plant and Equipment, net | | | |
North America | 560,918 |
| | 537,286 |
|
Europe (1) | 554,550 |
| | 293,539 |
|
Specialty | 85,535 |
| | 82,264 |
|
Total property, plant and equipment, net | 1,201,003 |
| | 913,089 |
|
Equity Method Investments | | | |
North America | 16,075 |
| | 336 |
|
Europe (3) | 141,334 |
| | 208,068 |
|
Total equity method investments | 157,409 |
| | 208,404 |
|
Other unallocated assets | 6,176,154 |
| | 4,837,490 |
|
Total assets | $ | 11,585,336 |
| | $ | 9,366,872 |
|
| |
(1) | The increase in assets for the Europe segment is primarily attributable to the Stahlgruber acquisition. Refer to Note 2, “Business Combinations,”13, "Leases," for further detail on the opening balance sheet amounts.information. |
| |
(2) | Refer to Note 4, "Financial Statement Information," for the increase"Investments in total receivables, net compared to December 31, 2017 as a result of the adoption of ASC 606. |
| |
(3) | Refer toUnconsolidated Subsidiaries" in Note 4, "Financial Statement Information," for further information. |
We report net receivables; inventories; net property, plant and equipment; net operating lease assets; and equity method investments by segment as that information is used by the chief operating decision maker in assessing segment performance. These assets provide a measure for the operating capital employed in each segment. Unallocated assets include cash and cash equivalents, prepaid and other current and noncurrent assets, goodwill and other intangibles.
Our largest countries of operation are the U.S., followed by the U.K. and Germany. Our otherAdditional European operations are located in the Netherlands, Belgium, Italy, Czech Republic, Austria,Belgium, Poland, Slovakia, Austria, and other European countries. Our operations in other countries include operations in Canada, engine remanufacturing and bumper refurbishing operations in Mexico, an aftermarket parts freight consolidation warehouse in Taiwan, and administrative support functions in India. Our net sales are attributed to geographic area based on the location of the selling operation.
The following table sets forth our revenue by geographic area (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenue | | | | | | | |
United States | $ | 1,579,691 |
| | $ | 1,535,557 |
| | $ | 4,735,134 |
| | $ | 4,716,927 |
|
United Kingdom | 394,621 |
| | 408,474 |
| | 1,217,199 |
| | 1,294,155 |
|
Germany | 394,115 |
| | 415,748 |
| | 1,196,527 |
| | 564,698 |
|
Other countries | 779,346 |
| | 762,599 |
| | 2,347,389 |
| | 2,298,113 |
|
Total revenue | $ | 3,147,773 |
| | $ | 3,122,378 |
| | $ | 9,496,249 |
| | $ | 8,873,893 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Revenue | | | | | | | |
United States | $ | 1,535,557 |
| | $ | 1,395,495 |
| | $ | 4,716,927 |
| | $ | 4,268,600 |
|
United Kingdom | 408,474 |
| | 399,155 |
| | 1,294,155 |
| | 1,171,829 |
|
Germany | 415,748 |
| | 549 |
| | 564,698 |
| | 862 |
|
Other countries | 762,599 |
| | 670,601 |
| | 2,298,113 |
| | 1,825,763 |
|
Total revenue | $ | 3,122,378 |
| | $ | 2,465,800 |
| | $ | 8,873,893 |
| | $ | 7,267,054 |
|
The following table sets forth our tangible long-lived assets by geographic area (in thousands):
|
| | | | | | | |
| September 30, | | December 31, |
| 2019 | | 2018 |
Long-lived assets (1) | | | |
United States | $ | 1,485,843 |
| | $ | 620,125 |
|
Germany | 295,570 |
| | 217,476 |
|
United Kingdom | 306,611 |
| | 165,145 |
|
Other countries | 399,424 |
| | 217,416 |
|
Total long-lived assets | $ | 2,487,448 |
| | $ | 1,220,162 |
|
| |
(1) | The increase in long-lived assets is primarily related to the net operating lease assets added as a result of the adoption of the new lease accounting standard. Refer to Note 13, "Leases," for further information. |
|
| | | | | | | |
| September 30, | | December 31, |
| 2018 | | 2017 |
Long-lived Assets | | | |
United States | $ | 609,562 |
| | $ | 583,236 |
|
Germany | 210,344 |
| | 41 |
|
United Kingdom | 170,940 |
| | 178,021 |
|
Other countries | 210,157 |
| | 151,791 |
|
Total long-lived assets | $ | 1,201,003 |
| | $ | 913,089 |
|
Note 17. Subsequent Event
On October 25, 2018, we announced that our Board of Directors authorized a stock repurchase program under which we may purchase up to $500 million of our common stock from time to time through October 25, 2021. Repurchases under the program may be made in the open market or in privately negotiated transactions, with the amount and timing of repurchases depending on market conditions and corporate needs. The repurchase program does not obligate us to acquire any specific number of shares and may be suspended or discontinued at any time.
Note 18.17. Condensed Consolidating Financial Information
LKQ Corporation (the "Parent") issued, and the Guarantors have fully and unconditionally guaranteed, jointly and severally, the U.S. Notes (2023) due on May 15, 2023. A Guarantor's guarantee will be unconditionally and automatically released and discharged upon the occurrence of any of the following events: (i) a transfer (including as a result of consolidation or merger) by the Guarantor to any person that is not a Guarantor of all or substantially all assets and properties of such Guarantor, provided the Guarantor is also released from its obligations with respect to indebtedness under the Credit Agreement or other indebtedness of ours, which obligation gave rise to the guarantee of the U.S. Notes (2023); (ii) a transfer (including as a result of consolidation or merger) to any person that is not a Guarantor of the equity interests of a Guarantor or issuance by a Guarantor of its equity interests such that the Guarantor ceases to be a subsidiary, as defined in the U.S. Notes (2023) Indenture, provided the Guarantor is also released from its obligations with respect to indebtedness under the Credit Agreement or other indebtedness of ours, which obligation gave rise to the guarantee of the U.S. Notes (2023); (iii) the release of the Guarantor from its obligations with respect to indebtedness under the Credit Agreement or other indebtedness of ours, which obligation gave rise to the guarantee of the U.S. Notes (2023); and (iv) upon legal defeasance, covenant defeasance or satisfaction and discharge of the U.S. Notes (2023) Indenture, as defined in the U.S. Notes (2023) Indenture.
Presented below are the unaudited condensed consolidating financial statements of the Parent, the Guarantors, the non-guarantor subsidiaries (the "Non-Guarantors"), and the elimination entries necessary to present our financial statements on a consolidated basis as required by Rule 3-10 of Regulation S-X of the Securities Exchange Act of 1934 resulting from the guarantees of the U.S. Notes (2023). Investments in consolidated subsidiaries have been presented under the equity method of accounting. The principal elimination entries eliminate investments in subsidiaries, intercompany balances, and intercompany revenue and expenses. The unaudited condensed consolidating financial statements below have been prepared from our financial information on the same basis of accounting as the unaudited condensed consolidated financial statements, and may not necessarily be indicative of the financial position, results of operations or cash flows had the Parent, Guarantors and Non-Guarantors operated as independent entities.
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Revenue | $ | — |
| | $ | 1,550,301 |
| | $ | 1,609,525 |
| | $ | (37,448 | ) | | $ | 3,122,378 |
|
Cost of goods sold | — |
| | 934,913 |
| | 1,027,715 |
| | (37,448 | ) | | 1,925,180 |
|
Gross margin | — |
|
| 615,388 |
|
| 581,810 |
|
| — |
| | 1,197,198 |
|
Selling, general and administrative expenses | 6,725 |
| | 434,965 |
| | 437,460 |
| | — |
| | 879,150 |
|
Restructuring and acquisition related expenses | — |
| | 1,638 |
| | 4,976 |
| | — |
| | 6,614 |
|
Depreciation and amortization | 34 |
| | 25,238 |
| | 51,429 |
| | — |
| | 76,701 |
|
Operating (loss) income | (6,759 | ) |
| 153,547 |
|
| 87,945 |
|
| — |
| | 234,733 |
|
Other expense (income): | | | | | | | | | |
Interest expense (income), net | 16,191 |
| | (193 | ) | | 24,862 |
| | — |
| | 40,860 |
|
Intercompany interest (income) expense, net | (15,121 | ) | | 10,014 |
| | 5,107 |
| | — |
| | — |
|
Other income, net | (178 | ) | | (3,514 | ) | | (3,267 | ) | | — |
| | (6,959 | ) |
Total other expense, net | 892 |
|
| 6,307 |
|
| 26,702 |
|
| — |
| | 33,901 |
|
(Loss) income before (benefit) provision for income taxes | (7,651 | ) |
| 147,240 |
|
| 61,243 |
|
| — |
| | 200,832 |
|
(Benefit) provision for income taxes | (12,008 | ) | | 41,875 |
| | 16,201 |
| | — |
| | 46,068 |
|
Equity in losses of unconsolidated subsidiaries | — |
| | (156 | ) | | (20,128 | ) | | — |
| | (20,284 | ) |
Equity in earnings of subsidiaries | 129,745 |
| | 4,467 |
| | — |
| | (134,212 | ) | | — |
|
Net income | 134,102 |
| | 109,676 |
| | 24,914 |
| | (134,212 | ) | | 134,480 |
|
Less: net income attributable to noncontrolling interest | — |
| | — |
| | 378 |
| | — |
| | 378 |
|
Net income attributable to LKQ stockholders | $ | 134,102 |
|
| $ | 109,676 |
|
| $ | 24,536 |
|
| $ | (134,212 | ) |
| $ | 134,102 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2019 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Revenue | $ | — |
| | $ | 1,593,983 |
| | $ | 1,593,245 |
| | $ | (39,455 | ) | | $ | 3,147,773 |
|
Cost of goods sold | — |
| | 954,366 |
| | 1,032,533 |
| | (39,455 | ) | | 1,947,444 |
|
Gross margin | — |
|
| 639,617 |
|
| 560,712 |
|
| — |
|
| 1,200,329 |
|
Selling, general and administrative expenses | 15,015 |
| | 442,554 |
| | 434,555 |
| | — |
| | 892,124 |
|
Restructuring and acquisition related expenses | — |
| | 426 |
| | 8,503 |
| | — |
| | 8,929 |
|
Impairment of net assets held for sale | — |
| | (2,339 | ) | | (1,262 | ) | | — |
| | (3,601 | ) |
Depreciation and amortization | 285 |
| | 25,893 |
| | 45,335 |
| | — |
| | 71,513 |
|
Operating (loss) income | (15,300 | ) |
| 173,083 |
|
| 73,581 |
|
| — |
|
| 231,364 |
|
Other expense (income): | | | | | | | | | |
Interest expense, net of interest income | 12,895 |
| | (166 | ) | | 19,247 |
| | — |
| | 31,976 |
|
Intercompany interest (income) expense, net
| (14,899 | ) | | 7,923 |
| | 6,976 |
| | — |
| | — |
|
Other income, net | (929 | ) | | (4,645 | ) | | (365 | ) | | — |
| | (5,939 | ) |
Total other (income) expense, net | (2,933 | ) |
| 3,112 |
|
| 25,858 |
|
| — |
|
| 26,037 |
|
(Loss) income from continuing operations before (benefit) provision for income taxes | (12,367 | ) |
| 169,971 |
|
| 47,723 |
|
| — |
| | 205,327 |
|
(Benefit) provision for income taxes | (2,268 | ) | | 42,515 |
| | 17,500 |
| | — |
| | 57,747 |
|
Equity in earnings of unconsolidated subsidiaries | — |
| | 393 |
| | 3,839 |
| | — |
| | 4,232 |
|
Equity in earnings of subsidiaries | 161,581 |
| | 4,098 |
| | — |
| | (165,679 | ) | | — |
|
Income from continuing operations | 151,482 |
| | 131,947 |
| | 34,062 |
| | (165,679 | ) | | 151,812 |
|
Net income from discontinued operations | 781 |
| | — |
| | 781 |
| | (781 | ) | | 781 |
|
Net income | 152,263 |
|
| 131,947 |
|
| 34,843 |
|
| (166,460 | ) | | 152,593 |
|
Less: net loss attributable to continuing noncontrolling interest | — |
| | — |
| | (46 | ) | | — |
| | (46 | ) |
Less: net income attributable to discontinued noncontrolling interest | — |
| | — |
| | 376 |
| | — |
| | 376 |
|
Net income attributable to LKQ stockholders | $ | 152,263 |
| | $ | 131,947 |
| | $ | 34,513 |
| | $ | (166,460 | ) | | $ | 152,263 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2017 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Revenue | $ | — |
| | $ | 1,433,742 |
| | $ | 1,069,682 |
| | $ | (37,624 | ) | | $ | 2,465,800 |
|
Cost of goods sold | — |
| | 861,078 |
| | 685,470 |
| | (37,624 | ) | | 1,508,924 |
|
Gross margin | — |
|
| 572,664 |
|
| 384,212 |
|
| — |
|
| 956,876 |
|
Selling, general and administrative expenses | 7,861 |
| | 394,926 |
| | 293,191 |
| | — |
| | 695,978 |
|
Restructuring and acquisition related expenses | — |
| | 1,473 |
| | 3,449 |
| | — |
| | 4,922 |
|
Depreciation and amortization | 29 |
| | 25,005 |
| | 31,843 |
| | — |
| | 56,877 |
|
Operating (loss) income | (7,890 | ) |
| 151,260 |
|
| 55,729 |
|
| — |
|
| 199,099 |
|
Other expense (income): | | | | | | | | | |
Interest expense, net | 16,232 |
| | 57 |
| | 8,933 |
| | — |
| | 25,222 |
|
Intercompany interest (income) expense, net | (2,389 | ) | | (2,814 | ) | | 5,203 |
| | — |
| | — |
|
Gain on bargain purchase | — |
| | — |
| | (913 | ) | | — |
| | (913 | ) |
Other expense (income), net | 32 |
| | (4,011 | ) | | 872 |
| | — |
| | (3,107 | ) |
Total other expense (income), net | 13,875 |
|
| (6,768 | ) |
| 14,095 |
|
| — |
|
| 21,202 |
|
(Loss) income before (benefit) provision for income taxes | (21,765 | ) |
| 158,028 |
|
| 41,634 |
|
| — |
| | 177,897 |
|
(Benefit) provision for income taxes | (8,436 | ) | | 56,920 |
| | 9,705 |
| | — |
| | 58,189 |
|
Equity in earnings of unconsolidated subsidiaries | — |
| | — |
| | 2,673 |
| | — |
| | 2,673 |
|
Equity in earnings of subsidiaries | 135,710 |
| | 6,674 |
| | — |
| | (142,384 | ) | | — |
|
Net income | $ | 122,381 |
|
| $ | 107,782 |
|
| $ | 34,602 |
|
| $ | (142,384 | ) | | $ | 122,381 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Revenue | $ | — |
| | $ | 1,550,301 |
| | $ | 1,609,525 |
| | $ | (37,448 | ) | | $ | 3,122,378 |
|
Cost of goods sold | — |
| | 934,913 |
| | 1,027,715 |
| | (37,448 | ) | | 1,925,180 |
|
Gross margin | — |
|
| 615,388 |
|
| 581,810 |
|
| — |
| | 1,197,198 |
|
Selling, general and administrative expenses | 6,725 |
| | 434,965 |
| | 437,460 |
| | — |
| | 879,150 |
|
Restructuring and acquisition related expenses | — |
| | 1,638 |
| | 4,976 |
| | — |
| | 6,614 |
|
Depreciation and amortization | 34 |
| | 25,238 |
| | 51,429 |
| | — |
| | 76,701 |
|
Operating (loss) income | (6,759 | ) |
| 153,547 |
|
| 87,945 |
|
| — |
| | 234,733 |
|
Other expense (income): | | | | | | | | | |
Interest expense, net of interest income | 16,191 |
| | (193 | ) | | 24,862 |
| | — |
| | 40,860 |
|
Intercompany interest (income) expense, net | (15,121 | ) | | 10,014 |
| | 5,107 |
| | — |
| | — |
|
Other income, net | (178 | ) |
| (3,514 | ) |
| (3,267 | ) |
| — |
| | (6,959 | ) |
Total other expense, net | 892 |
| | 6,307 |
| | 26,702 |
|
| — |
| | 33,901 |
|
(Loss) income before (benefit) provision for income taxes | (7,651 | ) | | 147,240 |
| | 61,243 |
| | — |
| | 200,832 |
|
(Benefit) provision for income taxes | (12,008 | ) | | 41,875 |
| | 16,201 |
| | — |
| | 46,068 |
|
Equity in losses of unconsolidated subsidiaries | — |
| | (156 | ) | | (20,128 | ) | | — |
| | (20,284 | ) |
Equity in earnings of subsidiaries | 129,745 |
| | 4,467 |
| | — |
| | (134,212 | ) | | — |
|
Net income | 134,102 |
|
| 109,676 |
|
| 24,914 |
|
| (134,212 | ) | | 134,480 |
|
Less: net income attributable to noncontrolling interest | — |
| | — |
| | 378 |
| | — |
| | 378 |
|
Net income attributable to LKQ stockholders | $ | 134,102 |
| | $ | 109,676 |
| | $ | 24,536 |
| | $ | (134,212 | ) | | $ | 134,102 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Revenue | $ | — |
| | $ | 4,768,292 |
| | $ | 4,216,417 |
| | $ | (110,816 | ) | | $ | 8,873,893 |
|
Cost of goods sold | — |
| | 2,869,499 |
| | 2,702,162 |
| | (110,816 | ) | | 5,460,845 |
|
Gross margin | — |
|
| 1,898,793 |
|
| 1,514,255 |
|
| — |
| | 3,413,048 |
|
Selling, general and administrative expenses | 25,538 |
| | 1,292,455 |
| | 1,154,092 |
| | — |
| | 2,472,085 |
|
Restructuring and acquisition related expenses | — |
| | 1,968 |
| | 24,578 |
| | — |
| | 26,546 |
|
Depreciation and amortization | 84 |
| | 74,102 |
| | 122,136 |
| | — |
| | 196,322 |
|
Operating (loss) income | (25,622 | ) |
| 530,268 |
|
| 213,449 |
|
| — |
| | 718,095 |
|
Other expense (income): | | | | | | | | | |
Interest expense (income), net | 52,004 |
| | (94 | ) | | 55,737 |
| | — |
| | 107,647 |
|
Intercompany interest (income) expense, net | (45,927 | ) | | 29,559 |
| | 16,368 |
| | — |
| | — |
|
Gains on bargain purchases | — |
| | — |
| | (328 | ) | | — |
| | (328 | ) |
Other (income) expense, net | (1,076 | ) | | (13,793 | ) | | 5,783 |
| | — |
| | (9,086 | ) |
Total other expense, net | 5,001 |
|
| 15,672 |
|
| 77,560 |
|
| — |
| | 98,233 |
|
(Loss) income before (benefit) provision for income taxes | (30,623 | ) | | 514,596 |
| | 135,889 |
|
| — |
| | 619,862 |
|
(Benefit) provision for income taxes | (19,656 | ) | | 141,295 |
| | 34,788 |
| | — |
| | 156,427 |
|
Equity in losses of unconsolidated subsidiaries | — |
| | (156 | ) | | (18,170 | ) | | — |
| | (18,326 | ) |
Equity in earnings of subsidiaries | 455,036 |
| | 14,028 |
| | — |
| | (469,064 | ) | | — |
|
Net income | 444,069 |
|
| 387,173 |
|
| 82,931 |
|
| (469,064 | ) | | 445,109 |
|
Less: net income attributable to noncontrolling interest | — |
| | — |
| | 1,040 |
| | — |
| | 1,040 |
|
Net income attributable to LKQ stockholders | $ | 444,069 |
|
| $ | 387,173 |
|
| $ | 81,891 |
|
| $ | (469,064 | ) | | $ | 444,069 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2019 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Revenue | $ | — |
| | $ | 4,774,588 |
| | $ | 4,836,439 |
| | $ | (114,778 | ) | | $ | 9,496,249 |
|
Cost of goods sold | — |
| | 2,850,011 |
| | 3,105,236 |
| | (114,778 | ) | | 5,840,469 |
|
Gross margin | — |
| | 1,924,577 |
| | 1,731,203 |
| | — |
| | 3,655,780 |
|
Selling, general and administrative expenses | 36,744 |
| | 1,301,827 |
| | 1,348,453 |
| | — |
| | 2,687,024 |
|
Restructuring and acquisition related expenses | — |
| | 5,063 |
| | 15,550 |
| | — |
| | 20,613 |
|
Impairment of net assets held for sale | — |
| | 39,355 |
| | 5,564 |
| | — |
| | 44,919 |
|
Depreciation and amortization | 377 |
| | 76,142 |
| | 136,830 |
| | — |
| | 213,349 |
|
Operating (loss) income | (37,121 | ) | | 502,190 |
|
| 224,806 |
| | — |
| | 689,875 |
|
Other expense (income): | | | | | | | | | |
Interest expense, net of interest income | 39,517 |
| | (285 | ) | | 64,717 |
| | — |
| | 103,949 |
|
Intercompany interest (income) expense, net
| (44,748 | ) | | 25,583 |
| | 19,165 |
| | — |
| | — |
|
Other (income) expense, net | (914 | ) | | (16,818 | ) | | 2,209 |
| | — |
| | (15,523 | ) |
Total other (income) expense, net | (6,145 | ) | | 8,480 |
| | 86,091 |
| | — |
| | 88,426 |
|
(Loss) income from continuing operations before (benefit) provision for income taxes | (30,976 | ) | | 493,710 |
| | 138,715 |
| | — |
| | 601,449 |
|
(Benefit) provision for income taxes | (7,306 | ) | | 128,936 |
| | 43,492 |
| | — |
| | 165,122 |
|
Equity in earnings (losses) of unconsolidated subsidiaries | — |
| | 871 |
| | (34,616 | ) | | — |
| | (33,745 | ) |
Equity in earnings of subsidiaries | 423,363 |
| | 13,210 |
| | — |
| | (436,573 | ) | | — |
|
Income from continuing operations | 399,693 |
| | 378,855 |
| | 60,607 |
| | (436,573 | ) | | 402,582 |
|
Net income from discontinued operations | 1,179 |
| | — |
| | 1,179 |
| | (1,179 | ) | | 1,179 |
|
Net income | 400,872 |
| | 378,855 |
| | 61,786 |
| | (437,752 | ) | | 403,761 |
|
Less: net income attributable to continuing noncontrolling interest | — |
| | — |
| | 2,321 |
| | — |
| | 2,321 |
|
Less: net income attributable to discontinued noncontrolling interest | — |
| | — |
| | 568 |
| | — |
| | 568 |
|
Net income attributable to LKQ stockholders | $ | 400,872 |
| | $ | 378,855 |
| | $ | 58,897 |
| | $ | (437,752 | ) | | $ | 400,872 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2017 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Revenue | $ | — |
| | $ | 4,374,693 |
| | $ | 3,001,386 |
| | $ | (109,025 | ) | | $ | 7,267,054 |
|
Cost of goods sold | — |
| | 2,613,540 |
| | 1,910,561 |
| | (109,025 | ) | | 4,415,076 |
|
Gross margin | — |
|
| 1,761,153 |
|
| 1,090,825 |
|
| — |
| | 2,851,978 |
|
Selling, general and administrative expenses | 26,209 |
| | 1,165,897 |
| | 810,959 |
| | — |
| | 2,003,065 |
|
Restructuring and acquisition related expenses | — |
| | 4,010 |
| | 6,361 |
| | — |
| | 10,371 |
|
Depreciation and amortization | 89 |
| | 73,072 |
| | 86,017 |
| | — |
| | 159,178 |
|
Operating (loss) income | (26,298 | ) |
| 518,174 |
|
| 187,488 |
|
| — |
| | 679,364 |
|
Other expense (income): | | | | | | | | | |
Interest expense, net | 48,904 |
| | 281 |
| | 24,621 |
| | — |
| | 73,806 |
|
Intercompany interest (income) expense, net | (10,221 | ) | | (4,530 | ) | | 14,751 |
| | — |
| | — |
|
Gains on bargain purchases | — |
| | — |
| | (3,990 | ) | | — |
| | (3,990 | ) |
Other expense (income), net | 286 |
| | (8,247 | ) | | 1,077 |
| | — |
| | (6,884 | ) |
Total other expense (income), net | 38,969 |
| | (12,496 | ) | | 36,459 |
| | — |
| | 62,932 |
|
(Loss) income from continuing operations before (benefit) provision for income taxes | (65,267 | ) | | 530,670 |
| | 151,029 |
| | — |
| | 616,432 |
|
(Benefit) provision for income taxes | (27,034 | ) | | 200,321 |
| | 32,919 |
| | — |
| | 206,206 |
|
Equity in earnings of unconsolidated subsidiaries | — |
| | — |
| | 3,878 |
| | — |
| | 3,878 |
|
Equity in earnings of subsidiaries | 452,337 |
| | 17,282 |
| | — |
| | (469,619 | ) | | — |
|
Income from continuing operations | 414,104 |
| | 347,631 |
| | 121,988 |
| | (469,619 | ) | | 414,104 |
|
Net (loss) income from discontinued operations | (4,531 | ) | | (4,531 | ) | | 2,050 |
| | 2,481 |
| | (4,531 | ) |
Net income | $ | 409,573 |
|
| $ | 343,100 |
|
| $ | 124,038 |
|
| $ | (467,138 | ) |
| $ | 409,573 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Revenue | $ | — |
| | $ | 4,768,292 |
| | $ | 4,216,417 |
| | $ | (110,816 | ) | | $ | 8,873,893 |
|
Cost of goods sold | — |
| | 2,869,499 |
| | 2,702,162 |
| | (110,816 | ) | | 5,460,845 |
|
Gross margin | — |
| | 1,898,793 |
| | 1,514,255 |
| | — |
| | 3,413,048 |
|
Selling, general and administrative expenses | 25,538 |
| | 1,292,455 |
| | 1,154,092 |
| | — |
| | 2,472,085 |
|
Restructuring and acquisition related expenses | — |
| | 1,968 |
| | 24,578 |
| | — |
| | 26,546 |
|
Depreciation and amortization | 84 |
| | 74,102 |
| | 122,136 |
| | — |
| | 196,322 |
|
Operating (loss) income | (25,622 | ) | | 530,268 |
| | 213,449 |
| | — |
| | 718,095 |
|
Other expense (income): | | | | | | | | |
|
Interest expense, net of interest income | 52,004 |
| | (94 | ) | | 55,737 |
| | — |
| | 107,647 |
|
Intercompany interest (income) expense, net | (45,927 | ) | | 29,559 |
| | 16,368 |
| | — |
| | — |
|
Other (income) expense, net | (1,076 | ) | | (13,793 | ) | | 5,455 |
| | — |
| | (9,414 | ) |
Total other expense, net | 5,001 |
| | 15,672 |
| | 77,560 |
| | — |
| | 98,233 |
|
(Loss) income before (benefit) provision for income taxes | (30,623 | ) | | 514,596 |
| | 135,889 |
| | — |
| | 619,862 |
|
(Benefit) provision for income taxes | (19,656 | ) | | 141,295 |
| | 34,788 |
| | — |
| | 156,427 |
|
Equity in losses of unconsolidated subsidiaries | — |
| | (156 | ) | | (18,170 | ) | | — |
| | (18,326 | ) |
Equity in earnings of subsidiaries | 455,036 |
| | 14,028 |
| | — |
| | (469,064 | ) | | — |
|
Net income | 444,069 |
|
| 387,173 |
|
| 82,931 |
|
| (469,064 | ) | | 445,109 |
|
Less: net income attributable to noncontrolling interest | — |
| | — |
| | 1,040 |
| | — |
| | 1,040 |
|
Net income attributable to LKQ stockholders | $ | 444,069 |
|
| $ | 387,173 |
|
| $ | 81,891 |
|
| $ | (469,064 | ) | | $ | 444,069 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Comprehensive Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Net income | $ | 134,102 |
| | $ | 109,676 |
| | $ | 24,914 |
| | $ | (134,212 | ) | | $ | 134,480 |
|
Less: net income attributable to noncontrolling interest | — |
| | — |
| | 378 |
| | — |
| | 378 |
|
Net income attributable to LKQ stockholders | 134,102 |
| | 109,676 |
| | 24,536 |
| | (134,212 | ) | | 134,102 |
|
| | | | | | | | | |
Other comprehensive (loss) income: | | | | | | | | | |
Foreign currency translation, net of tax | (20,951 | ) | | 1,686 |
| | (23,901 | ) | | 22,215 |
| | (20,951 | ) |
Net change in unrealized gains/losses on cash flow hedges, net of tax | 304 |
| | — |
| | — |
| | — |
| | 304 |
|
Net change in unrealized gains/losses on pension plans, net of tax | 1,274 |
| | 1,246 |
| | 28 |
| | (1,274 | ) | | 1,274 |
|
Net change in other comprehensive income from unconsolidated subsidiaries | 643 |
| | — |
| | 643 |
| | (643 | ) | | 643 |
|
Other comprehensive (loss) income | (18,730 | ) | | 2,932 |
| | (23,230 | ) | | 20,298 |
| | (18,730 | ) |
| | | | | | | | | |
Comprehensive income | 115,372 |
| | 112,608 |
| | 1,684 |
| | (113,914 | ) | | 115,750 |
|
Less: comprehensive income attributable to noncontrolling interest | — |
| | — |
| | 378 |
| | — |
| | 378 |
|
Comprehensive income attributable to LKQ stockholders | $ | 115,372 |
| | $ | 112,608 |
| | $ | 1,306 |
| | $ | (113,914 | ) | | $ | 115,372 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Comprehensive Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2019 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Net income | $ | 152,263 |
| | $ | 131,947 |
| | $ | 34,843 |
| | $ | (166,460 | ) | | $ | 152,593 |
|
Less: net loss attributable to continuing noncontrolling interest | — |
| | — |
| | (46 | ) | | — |
| | (46 | ) |
Less: net income attributable to discontinued noncontrolling interest | — |
| | — |
| | 376 |
| | — |
| | 376 |
|
Net income attributable to LKQ stockholders | 152,263 |
| | 131,947 |
| | 34,513 |
| | (166,460 | ) | | 152,263 |
|
| | | | | | | | | |
Other comprehensive (loss) income: | | | | | | | | | |
Foreign currency translation, net of tax | (69,819 | ) | | (1,429 | ) | | (69,520 | ) | | 70,949 |
| | (69,819 | ) |
Net change in unrealized gains/losses on cash flow hedges, net of tax | (1,261 | ) | | — |
| | — |
| | — |
| | (1,261 | ) |
Net change in unrealized gains/losses on pension plans, net of tax | (2,353 | ) | | (2,385 | ) | | 32 |
| | 2,353 |
| | (2,353 | ) |
Net change in other comprehensive income from unconsolidated subsidiaries | 1,240 |
| | — |
| | 1,240 |
| | (1,240 | ) | | 1,240 |
|
Other comprehensive loss | (72,193 | ) | | (3,814 | ) | | (68,248 | ) | | 72,062 |
| | (72,193 | ) |
| | | | | | | | | |
Comprehensive income (loss) | 80,070 |
| | 128,133 |
| | (33,405 | ) | | (94,398 | ) | | 80,400 |
|
Less: comprehensive loss attributable to continuing noncontrolling interest | — |
| | — |
| | (46 | ) | | — |
| | (46 | ) |
Less: comprehensive income attributable to discontinued noncontrolling interest | — |
|
| — |
| | 376 |
| | — |
| | 376 |
|
Comprehensive income (loss) attributable to LKQ stockholders | $ | 80,070 |
| | $ | 128,133 |
| | $ | (33,735 | ) | | $ | (94,398 | ) | | $ | 80,070 |
|
|
| | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2017 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Net income | $ | 122,381 |
| | $ | 107,782 |
| | $ | 34,602 |
| | $ | (142,384 | ) | | $ | 122,381 |
|
Other comprehensive income (loss): | | | | | | | | | |
Foreign currency translation, net of tax | 59,618 |
| | 3,590 |
| | 62,734 |
| | (66,324 | ) | | 59,618 |
|
Net change in unrecognized gains/losses on cash flow hedges, net of tax | (1,776 | ) | | — |
| | — |
| | — |
| | (1,776 | ) |
Net change in unrealized gains/losses on pension plans, net of tax | (150 | ) | | — |
| | (150 | ) | | 150 |
| | (150 | ) |
Net change in other comprehensive loss from unconsolidated subsidiaries | (1,034 | ) | | — |
| | (1,034 | ) | | 1,034 |
| | (1,034 | ) |
Total other comprehensive income | 56,658 |
| | 3,590 |
| | 61,550 |
| | (65,140 | ) | | 56,658 |
|
Total comprehensive income | $ | 179,039 |
| | $ | 111,372 |
| | $ | 96,152 |
| | $ | (207,524 | ) | | $ | 179,039 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Comprehensive Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Net income | $ | 134,102 |
| | $ | 109,676 |
| | $ | 24,914 |
| | $ | (134,212 | ) | | $ | 134,480 |
|
Less: net income attributable to continuing noncontrolling interest | — |
| | — |
| | 378 |
| | — |
| | 378 |
|
Net income attributable to LKQ stockholders | 134,102 |
| | 109,676 |
| | 24,536 |
| | (134,212 | ) | | 134,102 |
|
| | | | | | | | | |
Other comprehensive (loss) income: | | | | | | | | | |
Foreign currency translation, net of tax | (20,951 | ) | | 1,686 |
| | (23,901 | ) | | 22,215 |
| | (20,951 | ) |
Net change in unrealized gains/losses on cash flow hedges, net of tax | 304 |
| | — |
| | — |
| | — |
| | 304 |
|
Net change in unrealized gains/losses on pension plans, net of tax | 1,274 |
| | 1,246 |
| | 28 |
| | (1,274 | ) | | 1,274 |
|
Net change in other comprehensive income from unconsolidated subsidiaries | 643 |
| | — |
| | 643 |
| | (643 | ) | | 643 |
|
Other comprehensive (loss) income | (18,730 | ) | | 2,932 |
| | (23,230 | ) | | 20,298 |
| | (18,730 | ) |
| | | | | | | | | |
Comprehensive income | 115,372 |
| | 112,608 |
| | 1,684 |
| | (113,914 | ) | | 115,750 |
|
Less: comprehensive income attributable to continuing noncontrolling interest | — |
| | — |
| | 378 |
| | — |
| | 378 |
|
Comprehensive income attributable to LKQ stockholders | $ | 115,372 |
| | $ | 112,608 |
| | $ | 1,306 |
| | $ | (113,914 | ) | | $ | 115,372 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Comprehensive Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Net income | $ | 444,069 |
| | $ | 387,173 |
| | $ | 82,931 |
| | $ | (469,064 | ) | | $ | 445,109 |
|
Less: net income attributable to noncontrolling interest | — |
| | — |
| | 1,040 |
| | — |
| | 1,040 |
|
Net income attributable to LKQ stockholders | 444,069 |
| | 387,173 |
| | 81,891 |
| | (469,064 | ) | | 444,069 |
|
| | | | | | | | | |
Other comprehensive (loss) income: | | | | | | | | | |
Foreign currency translation, net of tax | (77,630 | ) | | (2,800 | ) | | (81,456 | ) | | 84,256 |
| | (77,630 | ) |
Net change in unrealized gains/losses on cash flow hedges, net of tax | 5,964 |
| | — |
| | — |
| | — |
| | 5,964 |
|
Net change in unrealized gains/losses on pension plans, net of tax | (154 | ) | | (239 | ) | | 85 |
| | 154 |
| | (154 | ) |
Net change in other comprehensive income from unconsolidated subsidiaries | 2,160 |
| | — |
| | 2,160 |
| | (2,160 | ) | | 2,160 |
|
Other comprehensive loss | (69,660 | ) | | (3,039 | ) | | (79,211 | ) | | 82,250 |
| | (69,660 | ) |
| | | | | | | | | |
Comprehensive income | 374,409 |
| | 384,134 |
| | 3,720 |
| | (386,814 | ) | | 375,449 |
|
Less: comprehensive income attributable to noncontrolling interest | — |
| | — |
| | 1,040 |
| | — |
| | 1,040 |
|
Comprehensive income attributable to LKQ stockholders | $ | 374,409 |
| | $ | 384,134 |
| | $ | 2,680 |
| | $ | (386,814 | ) | | $ | 374,409 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Comprehensive Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2019 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Net income | $ | 400,872 |
| | $ | 378,855 |
| | $ | 61,786 |
| | $ | (437,752 | ) | | $ | 403,761 |
|
Less: net income attributable to continuing noncontrolling interest | — |
| | — |
| | 2,321 |
| | — |
| | 2,321 |
|
Less: net income attributable to discontinued noncontrolling interest | — |
| | — |
| | 568 |
| | — |
| | 568 |
|
Net income attributable to LKQ stockholders | 400,872 |
| | 378,855 |
| | 58,897 |
| | (437,752 | ) | | 400,872 |
|
| | | | | | | | | |
Other comprehensive (loss) income: | | | | | | | | | |
Foreign currency translation, net of tax | (74,112 | ) | | 3,107 |
| | (74,900 | ) | | 71,793 |
| | (74,112 | ) |
Net change in unrealized gains/losses on cash flow hedges, net of tax | (9,648 | ) | | — |
| | — |
| | — |
| | (9,648 | ) |
Net change in unrealized gains/losses on pension plans, net of tax | (2,134 | ) | | (2,399 | ) | | 265 |
| | 2,134 |
| | (2,134 | ) |
Net change in other comprehensive income from unconsolidated subsidiaries | 98 |
| | — |
| | 98 |
| | (98 | ) | | 98 |
|
Other comprehensive (loss) income | (85,796 | ) | | 708 |
| | (74,537 | ) | | 73,829 |
| | (85,796 | ) |
| | | | | | | | | |
Comprehensive income (loss) | 315,076 |
| | 379,563 |
| | (12,751 | ) | | (363,923 | ) | | 317,965 |
|
Less: comprehensive income attributable to continuing noncontrolling interest | — |
| | — |
| | 2,321 |
| | — |
| | 2,321 |
|
Less: comprehensive income attributable to discontinued noncontrolling interest | — |
| | — |
| | 568 |
| | — |
| | 568 |
|
Comprehensive income (loss) attributable to LKQ stockholders | $ | 315,076 |
| | $ | 379,563 |
| | $ | (15,640 | ) | | $ | (363,923 | ) | | $ | 315,076 |
|
|
| | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2017 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Net income | $ | 409,573 |
| | $ | 343,100 |
| | $ | 124,038 |
| | $ | (467,138 | ) | | $ | 409,573 |
|
Other comprehensive income (loss): | | | | | | | | | |
Foreign currency translation, net of tax | 174,794 |
| | 17,565 |
| | 176,769 |
| | (194,334 | ) | | 174,794 |
|
Net change in unrecognized gains/losses on cash flow hedges, net of tax | 457 |
| | (133 | ) | | — |
| | 133 |
| | 457 |
|
Net change in unrealized gains/losses on pension plans, net of tax | (4,053 | ) | | (3,253 | ) | | (800 | ) | | 4,053 |
| | (4,053 | ) |
Net change in other comprehensive loss from unconsolidated subsidiaries | (1,635 | ) | | — |
| | (1,635 | ) | | 1,635 |
| | (1,635 | ) |
Total other comprehensive income | 169,563 |
| | 14,179 |
| | 174,334 |
| | (188,513 | ) | | 169,563 |
|
Total comprehensive income | $ | 579,136 |
| | $ | 357,279 |
| | $ | 298,372 |
| | $ | (655,651 | ) | | $ | 579,136 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Comprehensive Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Net income | $ | 444,069 |
| | $ | 387,173 |
| | $ | 82,931 |
| | $ | (469,064 | ) | | $ | 445,109 |
|
Less: net income attributable to continuing noncontrolling interest | — |
| | — |
| | 1,040 |
| | — |
| | 1,040 |
|
Net income attributable to LKQ stockholders | 444,069 |
| | 387,173 |
| | 81,891 |
| | (469,064 | ) | | 444,069 |
|
| | | | | | | | | |
Other comprehensive (loss) income: | | | | | | | | | |
Foreign currency translation, net of tax | (77,630 | ) | | (2,800 | ) | | (81,456 | ) | | 84,256 |
| | (77,630 | ) |
Net change in unrealized gains/losses on cash flow hedges, net of tax | 5,964 |
| | — |
| | — |
| | — |
| | 5,964 |
|
Net change in unrealized gains/losses on pension plans, net of tax | (154 | ) | | (239 | ) | | 85 |
| | 154 |
| | (154 | ) |
Net change in other comprehensive income from unconsolidated subsidiaries | 2,160 |
| | — |
| | 2,160 |
| | (2,160 | ) | | 2,160 |
|
Other comprehensive loss | (69,660 | ) | | (3,039 | ) | | (79,211 | ) | | 82,250 |
| | (69,660 | ) |
| | | | | | | | | |
Comprehensive income | 374,409 |
| | 384,134 |
| | 3,720 |
| | (386,814 | ) | | 375,449 |
|
Less: comprehensive income attributable to continuing noncontrolling interest | — |
| | — |
| | 1,040 |
| | — |
| | 1,040 |
|
Comprehensive income attributable to LKQ stockholders | $ | 374,409 |
| | $ | 384,134 |
| | $ | 2,680 |
| | $ | (386,814 | ) | | $ | 374,409 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Balance Sheets (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| September 30, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Assets | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 48,265 |
| | $ | 31,082 |
| | $ | 261,999 |
| | $ | — |
| | $ | 341,346 |
|
Receivables, net | 341 |
| | 366,781 |
| | 888,754 |
| | — |
| | 1,255,876 |
|
Intercompany receivables, net | 7,173 |
| | — |
| | 20,573 |
| | (27,746 | ) | | — |
|
Inventories | — |
| | 1,323,201 |
| | 1,471,693 |
| | — |
| | 2,794,894 |
|
Prepaid expenses and other current assets | 15,452 |
| | 94,787 |
| | 90,705 |
| | — |
| | 200,944 |
|
Total current assets | 71,231 |
| | 1,815,851 |
| | 2,733,724 |
| | (27,746 | ) | | 4,593,060 |
|
Property, plant and equipment, net | 845 |
| | 589,898 |
| | 610,260 |
| | — |
| | 1,201,003 |
|
Intangible assets: | | | | | | | | | |
Goodwill | — |
| | 2,005,560 |
| | 2,469,706 |
| | — |
| | 4,475,266 |
|
Other intangibles, net | 286 |
| | 280,229 |
| | 672,857 |
| | — |
| | 953,372 |
|
Investment in subsidiaries | 5,351,986 |
| | 114,721 |
| | — |
| | (5,466,707 | ) | | — |
|
Intercompany notes receivable | 1,067,356 |
| | 14,958 |
| | — |
| | (1,082,314 | ) | | — |
|
Equity method investments | — |
| | 16,075 |
| | 141,334 |
| | — |
| | 157,409 |
|
Other assets | 90,293 |
| | 38,434 |
| | 76,499 |
| | — |
| | 205,226 |
|
Total assets | $ | 6,581,997 |
| | $ | 4,875,726 |
| | $ | 6,704,380 |
| | $ | (6,576,767 | ) | | $ | 11,585,336 |
|
Liabilities and Stockholders’ Equity | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Accounts payable | $ | 2,615 |
| | $ | 345,660 |
| | $ | 593,472 |
| | $ | — |
| | $ | 941,747 |
|
Intercompany payables, net | — |
| | 20,573 |
| | 7,173 |
| | (27,746 | ) | | — |
|
Accrued expenses: | | | | | | | | | |
Accrued payroll-related liabilities | 7,169 |
| | 48,463 |
| | 97,904 |
| | — |
| | 153,536 |
|
Other accrued expenses | 12,656 |
| | 106,543 |
| | 239,013 |
| | — |
| | 358,212 |
|
Refund liability | — |
| | 54,554 |
| | 52,178 |
| | — |
| | 106,732 |
|
Other current liabilities | 283 |
| | 18,210 |
| | 38,595 |
| | — |
| | 57,088 |
|
Current portion of long-term obligations | — |
| | 2,317 |
| | 116,048 |
| | — |
| | 118,365 |
|
Total current liabilities | 22,723 |
| | 596,320 |
| | 1,144,383 |
| | (27,746 | ) | | 1,735,680 |
|
Long-term obligations, excluding current portion | 1,569,387 |
| | 14,027 |
| | 2,666,723 |
| | — |
| | 4,250,137 |
|
Intercompany notes payable | — |
| | 617,389 |
| | 464,925 |
| | (1,082,314 | ) | | — |
|
Deferred income taxes | 9,715 |
| | 115,924 |
| | 199,898 |
| | — |
| | 325,537 |
|
Other noncurrent liabilities | 139,712 |
| | 98,133 |
| | 138,721 |
| | — |
| | 376,566 |
|
Stockholders' equity: | | | | | | | | | |
Total Company stockholders’ equity | 4,840,460 |
| | 3,433,933 |
| | 2,032,774 |
| | (5,466,707 | ) | | 4,840,460 |
|
Noncontrolling interest | — |
| | — |
| | 56,956 |
| | — |
| | 56,956 |
|
Total stockholders’ equity | 4,840,460 |
| | 3,433,933 |
| | 2,089,730 |
| | (5,466,707 | ) | | 4,897,416 |
|
Total liabilities and stockholders' equity | $ | 6,581,997 |
| | $ | 4,875,726 |
| | $ | 6,704,380 |
| | $ | (6,576,767 | ) | | $ | 11,585,336 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Balance Sheets (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| September 30, 2019 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Assets | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 141,555 |
| | $ | 31,533 |
| | $ | 260,303 |
| | $ | — |
| | $ | 433,391 |
|
Receivables, net | — |
| | 337,543 |
| | 885,654 |
| | — |
| | 1,223,197 |
|
Intercompany receivables, net | 9,473 |
| | — |
| | 27,939 |
| | (37,412 | ) | | — |
|
Inventories | — |
| | 1,228,576 |
| | 1,353,612 |
| | — |
| | 2,582,188 |
|
Prepaid expenses and other current assets | 6,347 |
| | 95,389 |
| | 143,346 |
| | — |
| | 245,082 |
|
Total current assets | 157,375 |
| | 1,693,041 |
| | 2,670,854 |
| | (37,412 | ) | | 4,483,858 |
|
Property, plant and equipment, net | 459 |
| | 612,127 |
| | 571,602 |
| | — |
| | 1,184,188 |
|
Operating lease assets, net | 3,754 |
| | 854,956 |
| | 444,550 |
| | — |
| | 1,303,260 |
|
Intangible assets: | | | | | | | | | |
Goodwill | — |
| | 2,001,356 |
| | 2,308,466 |
| | — |
| | 4,309,822 |
|
Other intangibles, net | 629 |
| | 254,255 |
| | 582,388 |
| | — |
| | 837,272 |
|
Investment in subsidiaries | 5,250,321 |
| | 127,820 |
| | — |
| | (5,378,141 | ) | | — |
|
Intercompany notes receivable | 1,118,688 |
| | 108,071 |
| | — |
| | (1,226,759 | ) | | — |
|
Equity method investments | — |
| | 17,275 |
| | 126,734 |
| | — |
| | 144,009 |
|
Other noncurrent assets | 65,679 |
| | 40,503 |
| | 43,099 |
| | — |
| | 149,281 |
|
Total assets | $ | 6,596,905 |
| | $ | 5,709,404 |
| | $ | 6,747,693 |
| | $ | (6,642,312 | ) | | $ | 12,411,690 |
|
Liabilities and Stockholders' Equity | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Accounts payable | $ | 2,802 |
| | $ | 346,907 |
| | $ | 648,165 |
| | $ | — |
| | $ | 997,874 |
|
Intercompany payables, net | — |
| | 27,939 |
| | 9,473 |
| | (37,412 | ) | | — |
|
Accrued expenses: | | | | | | | | | |
Accrued payroll-related liabilities | 6,911 |
| | 55,803 |
| | 99,438 |
| | — |
| | 162,152 |
|
Refund liability | — |
| | 49,526 |
| | 50,801 |
| | — |
| | 100,327 |
|
Other accrued expenses | 14,965 |
| | 115,571 |
| | 196,098 |
| | — |
| | 326,634 |
|
Other current liabilities | 5,520 |
| | 22,723 |
| | 85,106 |
| | — |
| | 113,349 |
|
Current portion of operating lease liabilities | 217 |
| | 131,719 |
| | 93,636 |
| | — |
| | 225,572 |
|
Current portion of long-term obligations | 15,029 |
| | 2,936 |
| | 110,178 |
| | — |
| | 128,143 |
|
Total current liabilities | 45,444 |
| | 753,124 |
| | 1,292,895 |
| | (37,412 | ) | | 2,054,051 |
|
Long-term operating lease liabilities, excluding current portion | 3,943 |
| | 756,450 |
| | 369,030 |
| | — |
| | 1,129,423 |
|
Long-term obligations, excluding current portion | 1,613,249 |
| | 15,533 |
| | 2,108,330 |
| | — |
| | 3,737,112 |
|
Intercompany notes payable | — |
| | 537,341 |
| | 689,418 |
| | (1,226,759 | ) | | — |
|
Deferred income taxes | 5,032 |
| | 139,482 |
| | 151,685 |
| | — |
| | 296,199 |
|
Other noncurrent liabilities | 111,470 |
| | 82,835 |
| | 127,900 |
| | — |
| | 322,205 |
|
Stockholders' equity: | | | | | | | | | |
Total Company stockholders' equity | 4,817,767 |
| | 3,424,639 |
| | 1,953,502 |
| | (5,378,141 | ) | | 4,817,767 |
|
Noncontrolling interest | — |
| | — |
| | 54,933 |
| | — |
| | 54,933 |
|
Total stockholders' equity | 4,817,767 |
| | 3,424,639 |
| | 2,008,435 |
| | (5,378,141 | ) | | 4,872,700 |
|
Total liabilities and stockholders' equity | $ | 6,596,905 |
| | $ | 5,709,404 |
| | $ | 6,747,693 |
| | $ | (6,642,312 | ) | | $ | 12,411,690 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Balance Sheets (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Assets | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 34,360 |
| | $ | 35,131 |
| | $ | 210,275 |
| | $ | — |
| | $ | 279,766 |
|
Receivables, net | — |
| | 290,958 |
| | 736,148 |
| | — |
| | 1,027,106 |
|
Intercompany receivables, net | 2,669 |
| | 3,010 |
| | 230 |
| | (5,909 | ) | | — |
|
Inventories | — |
| | 1,334,766 |
| | 1,046,017 |
| | — |
| | 2,380,783 |
|
Prepaid expenses and other current assets | 34,136 |
| | 44,849 |
| | 55,494 |
| | — |
| | 134,479 |
|
Total current assets | 71,165 |
| | 1,708,714 |
| | 2,048,164 |
| | (5,909 | ) | | 3,822,134 |
|
Property, plant and equipment, net | 910 |
| | 563,262 |
| | 348,917 |
| | — |
| | 913,089 |
|
Intangible assets: | | | | | | | | | |
Goodwill | — |
| | 2,010,209 |
| | 1,526,302 |
| | — |
| | 3,536,511 |
|
Other intangibles, net | — |
| | 291,036 |
| | 452,733 |
| | — |
| | 743,769 |
|
Investment in subsidiaries | 5,952,687 |
| | 102,931 |
| | — |
| | (6,055,618 | ) | | — |
|
Intercompany notes receivable | 1,156,550 |
| | 782,638 |
| | — |
| | (1,939,188 | ) | | — |
|
Equity method investments | — |
| | 336 |
| | 208,068 |
| | — |
| | 208,404 |
|
Other assets | 70,590 |
| | 33,597 |
| | 38,778 |
| | — |
| | 142,965 |
|
Total assets | $ | 7,251,902 |
| | $ | 5,492,723 |
| | $ | 4,622,962 |
| | $ | (8,000,715 | ) | | $ | 9,366,872 |
|
Liabilities and Stockholders’ Equity | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Accounts payable | $ | 5,742 |
| | $ | 340,951 |
| | $ | 441,920 |
| | $ | — |
| | $ | 788,613 |
|
Intercompany payables, net | — |
| | 230 |
| | 5,679 |
| | (5,909 | ) | | — |
|
Accrued expenses: | | | | | | | | | |
Accrued payroll-related liabilities | 9,448 |
| | 65,811 |
| | 68,165 |
| | — |
| | 143,424 |
|
Other accrued expenses | 5,219 |
| | 95,900 |
| | 117,481 |
| | — |
| | 218,600 |
|
Other current liabilities | 282 |
| | 27,066 |
| | 18,379 |
| | — |
| | 45,727 |
|
Current portion of long-term obligations | 16,468 |
| | 1,912 |
| | 107,980 |
| | — |
| | 126,360 |
|
Total current liabilities | 37,159 |
| | 531,870 |
| | 759,604 |
| | (5,909 | ) | | 1,322,724 |
|
Long-term obligations, excluding current portion | 2,095,826 |
| | 7,372 |
| | 1,174,422 |
| | — |
| | 3,277,620 |
|
Intercompany notes payable | 750,000 |
| | 677,708 |
| | 511,480 |
| | (1,939,188 | ) | | — |
|
Deferred income taxes | 12,402 |
| | 116,021 |
| | 123,936 |
| | — |
| | 252,359 |
|
Other noncurrent liabilities | 158,346 |
| | 101,189 |
| | 47,981 |
| | — |
| | 307,516 |
|
Stockholders' equity: | | | | | | | | | |
Total Company stockholders’ equity | 4,198,169 |
| | 4,058,563 |
| | 1,997,055 |
| | (6,055,618 | ) | | 4,198,169 |
|
Noncontrolling interest | — |
| | — |
| | 8,484 |
| | — |
| | 8,484 |
|
Total stockholders’ equity | 4,198,169 |
| | 4,058,563 |
| | 2,005,539 |
| | (6,055,618 | ) | | 4,206,653 |
|
Total liabilities and stockholders' equity | $ | 7,251,902 |
| | $ | 5,492,723 |
| | $ | 4,622,962 |
| | $ | (8,000,715 | ) | | $ | 9,366,872 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Balance Sheets (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
Assets | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 25,633 |
| | $ | 29,285 |
| | $ | 276,843 |
| | $ | — |
| | $ | 331,761 |
|
Receivables, net | 310 |
| | 316,726 |
| | 837,047 |
| | — |
| | 1,154,083 |
|
Intercompany receivables, net | 6,978 |
| | — |
| | 12,880 |
| | (19,858 | ) | | — |
|
Inventories | — |
| | 1,343,612 |
| | 1,492,463 |
| | — |
| | 2,836,075 |
|
Prepaid expenses and other current assets | 18,611 |
| | 99,356 |
| | 81,063 |
| | — |
| | 199,030 |
|
Total current assets | 51,532 |
| | 1,788,979 |
| | 2,700,296 |
| | (19,858 | ) | | 4,520,949 |
|
Property, plant and equipment, net | 1,547 |
| | 600,054 |
| | 618,561 |
| | — |
| | 1,220,162 |
|
Intangible assets: | | | | | | | | | |
Goodwill | — |
| | 1,973,364 |
| | 2,408,094 |
| | — |
| | 4,381,458 |
|
Other intangibles, net | 260 |
| | 272,451 |
| | 656,041 |
| | — |
| | 928,752 |
|
Investment in subsidiaries | 5,224,006 |
| | 111,826 |
| | — |
| | (5,335,832 | ) | | — |
|
Intercompany notes receivable | 1,220,582 |
| | 10,515 |
| | — |
| | (1,231,097 | ) | | — |
|
Equity method investments | — |
| | 16,404 |
| | 162,765 |
| | — |
| | 179,169 |
|
Other noncurrent assets | 70,283 |
| | 40,548 |
| | 52,081 |
| | — |
| | 162,912 |
|
Total assets | $ | 6,568,210 |
| | $ | 4,814,141 |
| | $ | 6,597,838 |
| | $ | (6,586,787 | ) | | $ | 11,393,402 |
|
Liabilities and Stockholders' Equity | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Accounts payable | $ | 2,454 |
| | $ | 343,116 |
| | $ | 596,828 |
| | $ | — |
| | $ | 942,398 |
|
Intercompany payables, net | — |
| | 12,880 |
| | 6,978 |
| | (19,858 | ) | | — |
|
Accrued expenses: | | | | | | | | | |
Accrued payroll-related liabilities | 6,652 |
| | 70,267 |
| | 95,086 |
| | — |
| | 172,005 |
|
Refund liability | — |
| | 50,899 |
| | 53,686 |
| | — |
| | 104,585 |
|
Other accrued expenses | 5,454 |
| | 105,672 |
| | 177,299 |
| | — |
| | 288,425 |
|
Other current liabilities | 283 |
| | 17,860 |
| | 42,966 |
| | — |
| | 61,109 |
|
Current portion of long-term obligations | 8,459 |
| | 2,932 |
| | 110,435 |
| | — |
| | 121,826 |
|
Total current liabilities | 23,302 |
| | 603,626 |
| | 1,083,278 |
| | (19,858 | ) | | 1,690,348 |
|
Long-term obligations, excluding current portion | 1,628,677 |
| | 13,532 |
| | 2,546,465 |
| | — |
| | 4,188,674 |
|
Intercompany notes payable | — |
| | 597,283 |
| | 633,814 |
| | (1,231,097 | ) | | — |
|
Deferred income taxes | 8,045 |
| | 135,355 |
| | 168,034 |
| | — |
| | 311,434 |
|
Other noncurrent liabilities | 125,888 |
| | 99,147 |
| | 139,159 |
| | — |
| | 364,194 |
|
Stockholders' equity: | | | | | | | | | |
Total Company stockholders' equity | 4,782,298 |
| | 3,365,198 |
| | 1,970,634 |
| | (5,335,832 | ) | | 4,782,298 |
|
Noncontrolling interest | — |
| | — |
| | 56,454 |
| | — |
| | 56,454 |
|
Total stockholders' equity | 4,782,298 |
| | 3,365,198 |
| | 2,027,088 |
| | (5,335,832 | ) | | 4,838,752 |
|
Total liabilities and stockholders' equity | $ | 6,568,210 |
| | $ | 4,814,141 |
| | $ | 6,597,838 |
| | $ | (6,586,787 | ) | | $ | 11,393,402 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Cash Flows (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
Net cash provided by operating activities | $ | 334,226 |
| | $ | 142,626 |
| | $ | 97,506 |
| | $ | (53,191 | ) | | $ | 521,167 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
Purchases of property, plant and equipment | (315 | ) | | (93,063 | ) | | (78,385 | ) | | — |
| | (171,763 | ) |
Investment and intercompany note activity with subsidiaries | 73,096 |
| | — |
| | — |
| | (73,096 | ) | | — |
|
Return of investment in subsidiaries | 152,443 |
| | — |
| | — |
| | (152,443 | ) | | — |
|
Acquisitions, net of cash acquired | — |
| | (2,888 | ) | | (1,203,179 | ) | | — |
| | (1,206,067 | ) |
Investments in unconsolidated subsidiaries | — |
| | (11,066 | ) | | — |
| | — |
| | (11,066 | ) |
Receipts of deferred purchase price on receivables under factoring arrangements | — |
| | 224,753 |
| | 9,410 |
| | (224,753 | ) | | 9,410 |
|
Other investing activities, net | 887 |
| | 2,162 |
| | 4,921 |
| | — |
| | 7,970 |
|
Net cash provided by (used in) investing activities | 226,111 |
| | 119,898 |
| | (1,267,233 | ) | | (450,292 | ) | | (1,371,516 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
Proceeds from exercise of stock options | 3,772 |
| | — |
| | — |
| | — |
| | 3,772 |
|
Taxes paid related to net share settlements of stock-based compensation awards | (4,768 | ) | | — |
| | — |
| | — |
| | (4,768 | ) |
Debt issuance costs | (1,354 | ) | | — |
| | (15,584 | ) | | — |
| | (16,938 | ) |
Proceeds from issuance of Euro Notes (2026/28) | — |
| | — |
| | 1,232,100 |
| | — |
| | 1,232,100 |
|
Borrowings under revolving credit facilities | 304,000 |
| | — |
| | 721,496 |
| | — |
| | 1,025,496 |
|
Repayments under revolving credit facilities | (732,897 | ) | | — |
| | (377,138 | ) | | — |
| | (1,110,035 | ) |
Repayments under term loans | (114,800 | ) | | — |
| | — |
| | — |
| | (114,800 | ) |
(Repayments) borrowings of other debt, net | (385 | ) | | 101 |
| | (38,411 | ) | | — |
| | (38,695 | ) |
Other financing activities, net | — |
| | — |
| | 3,182 |
| | — |
| | 3,182 |
|
Investment and intercompany note activity with parent | — |
| | (62,763 | ) | | (10,333 | ) | | 73,096 |
| | — |
|
Dividends | — |
| | (203,448 | ) | | (226,939 | ) | | 430,387 |
| | — |
|
Net cash (used in) provided by financing activities | (546,432 | ) | | (266,110 | ) | | 1,288,373 |
| | 503,483 |
| | 979,314 |
|
Effect of exchange rate changes on cash and cash equivalents | — |
| | (463 | ) | | (66,922 | ) | | — |
| | (67,385 | ) |
Net increase (decrease) in cash and cash equivalents | 13,905 |
| | (4,049 | ) | | 51,724 |
| | — |
| | 61,580 |
|
Cash and cash equivalents, beginning of period | 34,360 |
| | 35,131 |
| | 210,275 |
| | — |
| | 279,766 |
|
Cash and cash equivalents, end of period | $ | 48,265 |
| | $ | 31,082 |
| | $ | 261,999 |
| | $ | — |
| | $ | 341,346 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Cash Flows (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2019 |
| Parent | | Guarantors | | Non-Guarantors (1) | | Eliminations | | Consolidated |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
Net cash provided by operating activities | $ | 404,790 |
| | $ | 196,160 |
| | $ | 451,224 |
| | $ | (87,003 | ) | | $ | 965,171 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
Purchases of property, plant and equipment | (563 | ) | | (86,713 | ) | | (78,275 | ) | | — |
| | (165,551 | ) |
Investment and intercompany note activity with subsidiaries | 33,838 |
| | — |
| | — |
| | (33,838 | ) | | — |
|
Acquisitions, net of cash acquired | — |
| | (10,118 | ) | | (4,399 | ) | | — |
| | (14,517 | ) |
Proceeds from disposal of businesses, net | — |
| | 19,682 |
| | (177 | ) | | — |
| | 19,505 |
|
Investments in unconsolidated subsidiaries | — |
| | (2,550 | ) | | (4,344 | ) | | — |
| | (6,894 | ) |
Receipts of deferred purchase price on receivables under factoring arrangements | — |
| | 264,998 |
| | — |
| | (264,998 | ) | | — |
|
Other investing activities, net | 966 |
| | 2,318 |
| | 4,084 |
| | — |
| | 7,368 |
|
Net cash provided by (used in) investing activities | 34,241 |
| | 187,617 |
| | (83,111 | ) | | (298,836 | ) | | (160,089 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
Purchase of treasury stock | (291,813 | ) | | — |
| | — |
| | — |
| | (291,813 | ) |
Borrowings under revolving credit facilities | 216,000 |
| | — |
| | 174,275 |
| | — |
| | 390,275 |
|
Repayments under revolving credit facilities | (220,896 | ) | | — |
| | (392,862 | ) | | — |
| | (613,758 | ) |
Repayments under term loans | (6,563 | ) | | — |
| | — |
| | — |
| | (6,563 | ) |
Borrowings under receivables securitization facility | — |
| | — |
| | 36,600 |
| | — |
| | 36,600 |
|
Repayments under receivables securitization facility | — |
| | — |
| | (146,600 | ) | | — |
| | (146,600 | ) |
Payment of notes issued from acquisitions | (19,123 | ) | | — |
| | — |
| | — |
| | (19,123 | ) |
Repayments of other debt, net | (747 | ) | | (908 | ) | | (29,932 | ) | | — |
| | (31,587 | ) |
Other financing activities, net | 33 |
| | — |
| | (7,158 | ) | | — |
| | (7,125 | ) |
Investment and intercompany note activity with parent | — |
| | (29,242 | ) | | (4,596 | ) | | 33,838 |
| | — |
|
Dividends | — |
| | (352,001 | ) | | — |
| | 352,001 |
| | — |
|
Net cash used in financing activities | (323,109 | ) | | (382,151 | ) | | (370,273 | ) | | 385,839 |
| | (689,694 | ) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | — |
| | 622 |
| | (10,324 | ) | | — |
| | (9,702 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash | 115,922 |
| | 2,248 |
| | (12,484 | ) | | — |
| | 105,686 |
|
Cash, cash equivalents and restricted cash of continuing operations, beginning of period | 25,633 |
| | 29,285 |
| | 282,332 |
| | — |
| | 337,250 |
|
Cash, cash equivalents and restricted cash of continuing and discontinued operations, end of period | 141,555 |
| | 31,533 |
| | 269,848 |
| | — |
| | 442,936 |
|
Less: Cash and cash equivalents of discontinued operations, end of period | — |
| | — |
| | 4,328 |
| | — |
| | 4,328 |
|
Cash, cash equivalents and restricted cash, end of period | $ | 141,555 |
| | $ | 31,533 |
| | $ | 265,520 |
| | $ | — |
| | $ | 438,608 |
|
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Cash Flows (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2017 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
Net cash provided by operating activities | $ | 227,314 |
| | $ | 162,114 |
| | $ | 108,095 |
| | $ | (48,280 | ) | | $ | 449,243 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
Purchases of property, plant and equipment | (509 | ) | | (70,292 | ) | | (64,736 | ) | | — |
| | (135,537 | ) |
Investment and intercompany note activity with subsidiaries | 296,561 |
| | — |
| | — |
| | (296,561 | ) | | — |
|
Acquisitions, net of cash acquired | — |
| | (79,496 | ) | | (173,171 | ) | | — |
| | (252,667 | ) |
Proceeds from disposals of business/investment | — |
| | 305,740 |
| | (4,443 | ) | | — |
| | 301,297 |
|
Investments in unconsolidated subsidiaries | — |
| | (2,200 | ) | | (4,914 | ) | | — |
| | (7,114 | ) |
Receipts of deferred purchase price on receivables under factoring arrangements (1) | — |
| | 226,395 |
| | — |
| | (226,395 | ) | | — |
|
Other investing activities, net | — |
| | 3,100 |
| | 6,764 |
| | — |
| | 9,864 |
|
Net cash provided by (used in) investing activities | 296,052 |
| | 383,247 |
| | (240,500 | ) | | (522,956 | ) | | (84,157 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
Proceeds from exercise of stock options | 6,465 |
| | — |
| | — |
| | — |
| | 6,465 |
|
Taxes paid related to net share settlements of stock-based compensation awards | (5,095 | ) | | — |
| | — |
| | — |
| | (5,095 | ) |
Borrowings under revolving credit facilities | 187,000 |
| | — |
| | 237,976 |
| | — |
| | 424,976 |
|
Repayments under revolving credit facilities | (694,896 | ) | | — |
| | (75,988 | ) | | — |
| | (770,884 | ) |
Repayments under term loans | (27,884 | ) | | — |
| | — |
| | — |
| | (27,884 | ) |
Borrowings under receivables securitization facility | — |
| | — |
| | 8,525 |
| | — |
| | 8,525 |
|
Repayments under receivables securitization facility | — |
| | — |
| | (9,925 | ) | | — |
| | (9,925 | ) |
(Repayments) borrowings of other debt, net | (1,700 | ) | | (1,238 | ) | | 27,460 |
| | — |
| | 24,522 |
|
Payments of other obligations | — |
| | (1,336 | ) | | (743 | ) | | — |
| | (2,079 | ) |
Other financing activities, net | — |
| | 5,000 |
| | (684 | ) | | — |
| | 4,316 |
|
Investment and intercompany note activity with parent | — |
| | (286,530 | ) | | (10,031 | ) | | 296,561 |
| | — |
|
Dividends | — |
| | (274,675 | ) | | — |
| | 274,675 |
| | — |
|
Net cash (used in) provided by financing activities | (536,110 | ) | | (558,779 | ) | | 176,590 |
| | 571,236 |
| | (347,063 | ) |
Effect of exchange rate changes on cash and cash equivalents | — |
| | 322 |
| | 22,216 |
| | — |
| | 22,538 |
|
Net (decrease) increase in cash and cash equivalents | (12,744 | ) | | (13,096 | ) | | 66,401 |
| | — |
| | 40,561 |
|
Cash and cash equivalents of continuing operations, beginning of period | 33,030 |
| | 35,360 |
| | 159,010 |
| | — |
| | 227,400 |
|
Add: Cash and cash equivalents of discontinued operations, beginning of period | — |
| | 149 |
| | 6,967 |
| | — |
| | 7,116 |
|
Cash and cash equivalents of continuing and discontinued operations, beginning of period | 33,030 |
| | 35,509 |
| | 165,977 |
| | — |
| | 234,516 |
|
Cash and cash equivalents, end of period | $ | 20,286 |
| | $ | 22,413 |
| | $ | 232,378 |
| | $ | — |
| | $ | 275,077 |
|
(1) ReflectsRestricted cash is only included in the impactunaudited condensed consolidating financial statements of adopting ASU 2016-15the Non-Guarantors.
LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidating Statements of Cash Flows (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2018 |
| Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
Net cash provided by operating activities | $ | 334,226 |
| | $ | 142,626 |
| | $ | 97,506 |
| | $ | (53,191 | ) | | $ | 521,167 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
Purchases of property, plant and equipment | (315 | ) | | (93,063 | ) | | (78,385 | ) | | — |
| | (171,763 | ) |
Investment and intercompany note activity with subsidiaries | 73,096 |
| | — |
| | — |
| | (73,096 | ) | | — |
|
Return of investment in subsidiaries | 152,443 |
| | — |
| | — |
| | (152,443 | ) | | — |
|
Acquisitions, net of cash acquired | — |
| | (2,888 | ) | | (1,203,179 | ) | | — |
| | (1,206,067 | ) |
Investments in unconsolidated subsidiaries | — |
| | (11,066 | ) | | — |
| | — |
| | (11,066 | ) |
Receipts of deferred purchase price on receivables under factoring arrangements | — |
| | 224,753 |
| | 9,410 |
| | (224,753 | ) | | 9,410 |
|
Other investing activities, net | 887 |
| | 2,162 |
| | 4,921 |
| | — |
| | 7,970 |
|
Net cash provided by (used in) investing activities | 226,111 |
| | 119,898 |
| | (1,267,233 | ) | | (450,292 | ) | | (1,371,516 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
Debt issuance costs | (1,354 | ) | | — |
| | (15,584 | ) | | — |
| | (16,938 | ) |
Proceeds from issuance of Euro Notes (2026/28) | — |
| | — |
| | 1,232,100 |
| | — |
| | 1,232,100 |
|
Borrowings under revolving credit facilities | 304,000 |
| | — |
| | 721,496 |
| | — |
| | 1,025,496 |
|
Repayments under revolving credit facilities | (732,897 | ) | | — |
| | (377,138 | ) | | — |
| | (1,110,035 | ) |
Repayments under term loans | (114,800 | ) | | — |
| | — |
| | — |
| | (114,800 | ) |
(Repayments) borrowings of other debt, net | (385 | ) | | 101 |
| | (38,411 | ) | | — |
| | (38,695 | ) |
Other financing activities, net | (996 | ) | | — |
| | 3,182 |
| | — |
| | 2,186 |
|
Investment and intercompany note activity with parent | — |
| | (62,763 | ) | | (10,333 | ) | | 73,096 |
| | — |
|
Dividends | — |
| | (203,448 | ) | | (226,939 | ) | | 430,387 |
| | — |
|
Net cash (used in) provided by financing activities | (546,432 | ) | | (266,110 | ) | | 1,288,373 |
| | 503,483 |
| | 979,314 |
|
Effect of exchange rate changes on cash and cash equivalents | — |
| | (463 | ) | | (66,922 | ) | | — |
| | (67,385 | ) |
Net increase (decrease) in cash and cash equivalents | 13,905 |
| | (4,049 | ) | | 51,724 |
| | — |
| | 61,580 |
|
Cash and cash equivalents, beginning of period | 34,360 |
| | 35,131 |
| | 210,275 |
| | — |
| | 279,766 |
|
Cash and cash equivalents, end of period | $ | 48,265 |
| | $ | 31,082 |
| | $ | 261,999 |
| | $ | — |
| | $ | 341,346 |
|
Forward-Looking Statements
Statements and information in this Quarterly Report on Form 10-Q that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are made pursuant to the "safe harbor"“safe harbor” provisions of such Act.
Forward-looking statements include, but are not limited to, statements regarding our outlook, guidance, expectations, beliefs, hopes, intentions and strategies. Words such as “may,” “will,” “plan,” “should,” “expect,” “anticipate,” “believe,” “if,” “estimate,” “intend,” “project” and similar words or expressions are used to identify these forward-looking statements. These statements are subject to a number of risks, uncertainties, assumptions and other factors that may cause our actual results, performance or achievements to be materially different. All forward-looking statements are based on information available to us at the time the statements are made. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
You should not place undue reliance on our forward-looking statements. Actual events or results may differ materially from those expressed or implied in the forward-looking statements. The risks, uncertainties, assumptions and other factors that could cause actual results to differ from the results predicted or implied by our forward-looking statements include factors discussed in our filings with the SEC, including those disclosed under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 20172018 Form 10-K and in our subsequent Quarterly Reports on Form 10-Q (including this Quarterly Report).
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a global distributor 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.
Buyers of vehicle replacement products have the option to purchase from primarily five sources: new products produced by original equipment manufacturers ("OEMs");OEMs; new products produced by companies other than the OEMs, which are referred to as aftermarket products; recycled products obtained from salvage and total loss vehicles; recycled products that have been refurbished; and recycled products that have been remanufactured. We distribute a variety of products to collision and mechanical repair shops, including aftermarket collision and mechanical products; recycled collision and mechanical products; refurbished collision products such as wheels, bumper covers and lights; and remanufactured engines and transmissions. Collectively, we refer to the four sources that are not new OEM products as alternative parts.
We are a leading provider of alternative vehicle collision replacement products and alternative vehicle mechanical replacement products, with our sales, processing, and distribution facilities reaching most major markets in the United States and Canada. We are also a leading provider of alternative vehicle replacement and maintenance products in Europe.the United Kingdom, Germany, the Benelux region (Belgium, Netherlands, and Luxembourg), Italy, Czech Republic, Poland, Slovakia, Austria, and various other European countries. In addition to our wholesale operations, we operate self service retail facilities across the U.S. that sell recycled automotive products from end-of-life-vehicles. We are also a leading distributor of specialty vehicle aftermarket equipment and accessories reaching most major markets in the U.S. and Canada.
We are organized into four operating segments: Wholesale – North America; Europe; Specialty and Self Service. We aggregate our Wholesale – North America and Self Service operating segments into one reportable segment, North America, resulting in three reportable segments: North America, Europe and Specialty.
Our operating results have fluctuated on a quarterly and annual basis in the past and can be expected to continue to fluctuate in the future as a result of a number of factors, some of which are beyond our control. Please refer to the factors referred to in Forward-Looking Statements above. Due to these factors and others, which may be unknown to us at this time, our operating results in future periods can be expected to fluctuate. Accordingly, our historical results of operations may not be indicative of future performance.
Acquisitions and Investments
Since our inception in 1998, we have pursued a growth strategy through both organic growth and acquisitions. We have pursued acquisitions that we believe will help drive profitability, cash flow and stockholder value. We target companies that are market leaders, will expand our geographic presence and will enhance our ability to provide a wide array of vehicle products to our customers through our distribution network.
During the threenine months ended September 30, 2018,2019, we acquiredcompleted five acquisitions, including one wholesale business and one self service business in North America, and three wholesale businesses in Europe.
On May 30, 2018, we acquired Stahlgruber, a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories with operations in Germany, Eastern Europe,Austria, Italy, Slovenia, and Croatia with further sales to Switzerland. This acquisition expandsexpanded LKQ's geographic presence in continental Europe and serves as an additional strategic hub for our European operations. In addition, we believe this acquisition willshould allow for continued improvement in procurement, logistics and infrastructure optimization. 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.
On July 3, 2017, we acquired four parts distribution businesses in Belgium. The objective of these acquisitions was to transform the existing three-step distribution model in Belgium to a two-step distribution model to align with our Netherlands operations.
On November 1, 2017, we acquired the aftermarket business of Warn, a leading designer, manufacturer and marketer of high performance vehicle equipment and accessories. We expect the acquisition of Warn to expand LKQ's presence in the specialty market and create viable points of entry into related markets.
In addition to the parts distribution businesses acquired in Belgium and theStahlgruber acquisition, of Warn, during the year ended December 31, 2017,2018, we completed 21 acquisitions, including 6 wholesaleacquired various smaller businesses inacross our North America 12 wholesale businessesand Europe segments.
On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen, the leading independent car parts and service chain in the Nordic region of Europe, offering a wide range of quality products including spare parts and 3 Specialty aftermarketaccessories for cars, and workshop services for consumers and businesses. We acquired additional shares in the fourth quarter of 2018, increasing our equity interest to 26.6%. We are accounting for our interest in Mekonomen using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over the investee.
See Note 2, "Business Combinations"Combinations," and "Investments in Unconsolidated Subsidiaries" in Note 4, "Financial Statement Information," to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to our acquisitions.acquisitions and investments.
Sources of Revenue
We report our revenue in two categories: (i) parts and services and (ii) other. 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. Our service revenue is generated primarily from the sale of service-type warranties, fees for admission to our self service yards, diagnostic and repair services, and processing fees related to the secure disposal of vehicles. 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. Other revenue will vary from period to period based on fluctuations in commodity prices and the volume of materials sold. See Note 5, "Revenue Recognition" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to our sources of revenue.
Selling, GeneralCritical Accounting Policies and Administrative ExpensesEstimates
In our 2017 Form 10-K,On January 1, 2019, we reportedadopted ASU 2016-02, which represents FASB ASC 842. We adopted the following categoriesnew guidance using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application with no restatement of comparative periods. The most significant impact was the recognition of lease assets and liabilities for operating expenses: (i) facility and warehouse expenses; (ii) distribution expenses; and (iii) selling, general and administrative expenses. To better reflect the changing profileleases. Refer to “Recent Accounting Pronouncements–Adoption of our business, and to align our financial statement presentation with other automotive parts and distribution companies, beginning with our Quarterly Report on Form 10-Q for the three months ended March 31, 2018, these three categories have been consolidated into one line item: selling, general and administrative expenses.
Other than the consolidation of these financial statement line items and the change due to the adoption of ASU 2014-09 as discussedNew Lease Standard” in Note 4, "Financial Statement Information"Information” and Note 13, "Leases” to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q there have been no changes to the classification of revenue or expenses on our Unaudited Condensed Consolidated Statements of Income. Our selling, general and administrative expenses continue to include: personnel costs for employees in selling, general and administrative functions; costs to operate our selling locations, corporate offices and back office support centers; costs to transport our products from our facilities to our customers; and other selling, general and administrative expenses, such as professional fees, supplies, and advertising expenses.
Seasonality
Our operating results are subject to quarterly variations based on a variety of factors, influenced primarily by seasonal changes in weather patterns. During the winter months, we tend to have higher demand for our vehicle replacement products because there are more weather related repairs. Our specialty vehicle operations typically generate greater revenue and earnings in the first half of the year, when vehicle owners tend to install this equipment. Our aftermarket glass operations typically generate greater revenue and earnings in the second and third quarters, when the demand for automotive replacement glass increases after the winter weather.
Critical Accounting Policies and Estimatesadditional information.
The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP").GAAP. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Our 20172018 Form 10-K includes a summary of the critical accounting policies and estimates we believe are the most important to aid in understanding our financial results. ThereOther than the adoption of ASU 2016-02 described above, there have been no changes to those critical accounting policies or estimates that have had a material impact on our reported amounts of assets, liabilities, revenue or expenses during the nine months ended September 30, 2018.2019.
Recently Issued Accounting Pronouncements
See "Recent Accounting Pronouncements" in Note 4, "Financial Statement Information" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information related to new accounting standards.
Financial Information by Geographic Area
See Note 16, "Segment and Geographic Information"Information" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information related to our revenue and long-lived assets by geographic region.
1 LKQ Europe Program
We have undertaken the 1 LKQ Europe program to create structural centralization and standardization of key functions to facilitate the operation of the Europe segment as a single business. Under this multi-year program, we have recognized to date and expect to continue to recognize the following:
Restructuring expenses - Non-recurring costs resulting directly from the implementation of the 1 LKQ Europe program from which the business will derive no ongoing benefit. See Note 6, “Restructuring and Acquisition Related Expenses” to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details.
Transformation expenses - Period costs incurred to execute the 1 LKQ Europe program that are expected to contribute to ongoing benefits to the business (e.g. non-capitalizable implementation costs related to a common ERP system). These expenses are recorded in Selling, general and administrative expenses.
Transformation capital expenditures - Capitalizable costs for long-lived assets, such as software and facilities, that directly relate to the execution of the 1 LKQ Europe program.
Costs related to the 1 LKQ Europe program incurred to date are reflected in Selling, general and administrative expenses and Purchases of property, plant and equipment in our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. We expect that future costs of the program, reflecting all three categories noted above, will range between $135 million and $160 million for the period from 2019 through 2021 with an additional $80 million to $100 million between 2022 and the projected completion date of the project in 2024.
Results of Operations—Consolidated
The following table sets forth statements of income data as a percentage of total revenue for the periods indicated:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of goods sold | 61.7 | % | | 61.2 | % | | 61.5 | % | | 60.8 | % | 61.9 | % | | 61.7 | % | | 61.5 | % | | 61.5 | % |
Gross margin | 38.3 | % | | 38.8 | % | | 38.5 | % | | 39.2 | % | 38.1 | % | | 38.3 | % | | 38.5 | % | | 38.5 | % |
Selling, general and administrative expenses | 28.2 | % | | 28.2 | % | | 27.9 | % | | 27.6 | % | 28.3 | % | | 28.2 | % | | 28.3 | % | | 27.9 | % |
Restructuring and acquisition related expenses | 0.2 | % | | 0.2 | % | | 0.3 | % | | 0.1 | % | 0.3 | % | | 0.2 | % | | 0.2 | % | | 0.3 | % |
Impairment of net assets held for sale | | (0.1 | )% | | — |
| | 0.5 | % | | — |
|
Depreciation and amortization | 2.5 | % | | 2.3 | % | | 2.2 | % | | 2.2 | % | 2.3 | % | | 2.5 | % | | 2.2 | % | | 2.2 | % |
Operating income | 7.5 | % | | 8.1 | % | | 8.1 | % | | 9.3 | % | 7.4 | % | | 7.5 | % | | 7.3 | % | | 8.1 | % |
Other expense, net | 1.1 | % | | 0.9 | % | | 1.1 | % | | 0.9 | % | 0.8 | % | | 1.1 | % | | 0.9 | % | | 1.1 | % |
Income from continuing operations before provision for income taxes | 6.4 | % | | 7.2 | % | | 7.0 | % | | 8.5 | % | 6.5 | % | | 6.4 | % | | 6.3 | % | | 7.0 | % |
Provision for income taxes | 1.5 | % | | 2.4 | % | | 1.8 | % | | 2.8 | % | 1.8 | % | | 1.5 | % | | 1.7 | % | | 1.8 | % |
Equity in (losses) earnings of unconsolidated subsidiaries | (0.6 | )% | | 0.1 | % | | (0.2 | )% | | 0.1 | % | |
Equity in earnings (losses) of unconsolidated subsidiaries | | 0.1 | % | | (0.6 | )% | | (0.4 | )% | | (0.2 | )% |
Income from continuing operations | 4.3 | % | | 5.0 | % | | 5.0 | % | | 5.7 | % | 4.8 | % | | 4.3 | % | | 4.2 | % | | 5.0 | % |
Net loss from discontinued operations | — | % | | — | % | | — | % | | (0.1 | )% | |
Net income from discontinued operations | | 0.0 | % | | — |
| | 0.0 | % | | — |
|
Net income | 4.3 | % | | 5.0 | % | | 5.0 | % | | 5.6 | % | 4.8 | % | | 4.3 | % | | 4.3 | % | | 5.0 | % |
Less: net income attributable to noncontrolling interest | 0.0 | % | | — | % | | 0.0 | % | | — | % | |
Less: net (loss) income attributable to continuing noncontrolling interest | | (0.0 | )% | | 0.0 | % | | 0.0 | % | | 0.0 | % |
Less: net income attributable to discontinued noncontrolling interest | | 0.0 | % | | — |
| | 0.0 | % | | — |
|
Net income attributable to LKQ stockholders | 4.3 | % | | 5.0 | % | | 5.0 | % | | 5.6 | % | 4.8 | % | | 4.3 | % | | 4.2 | % | | 5.0 | % |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. | Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. | Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. | | | | |
Three Months Ended September 30, 20182019 Compared to Three Months Ended September 30, 20172018
Revenue. The following table summarizes the changes in revenue by category (in thousands):
| | | Three Months Ended | | | Three Months Ended | | |
| September 30, | | Percentage Change in Revenue | September 30, | | Percentage Change in Revenue |
| 2018 | | 2017 | | Organic | | Acquisition | | Foreign Exchange | | Total Change | 2019 | | 2018 | | Organic | | Acquisition | | Foreign Exchange | | Total Change |
Parts & services revenue | $ | 2,961,981 |
| | $ | 2,333,757 |
| | 4.3 | % | | 23.2 | % | | (0.6 | )% | | 26.9 | % | $ | 2,985,998 |
| | $ | 2,961,981 |
| | 2.3 | % | | 0.8 | % | | (2.3 | )% | | 0.8 | % |
Other revenue | 160,397 |
| | 132,043 |
| | 18.9 | % | | 2.7 | % | | (0.1 | )% | | 21.5 | % | 161,775 |
| | 160,397 |
| | 0.0 | % | | 1.1 | % | | (0.3 | )% | | 0.9 | % |
Total revenue | $ | 3,122,378 |
| | $ | 2,465,800 |
| | 5.1 | % | | 22.1 | % | | (0.6 | )% | | 26.6 | % | $ | 3,147,773 |
| | $ | 3,122,378 |
| | 2.2 | % | | 0.8 | % | | (2.2 | )% | | 0.8 | % |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
The changegrowth in parts and services revenue of 26.9%0.8% represented increases in segment revenue of 5.5%3.3% in North America 53.7%and 1.4% in EuropeSpecialty and 18.0%a decrease of segment revenue of 1.2% in Specialty.Europe. Organic parts and services revenue grew by 2.3%, which included a 1.4% positive effect from one additional selling day in the third quarter of 2019, resulting in an organic growth of 0.9% on a per day basis. The increase in other revenue of 21.5%0.9% was primarily driven by a $25$2 million organicacquisition increase, largely attributable to our North America segment. Refer to the discussion of our segment results of operations for factors contributing to the change in revenue by segment during the third quarter of 20182019 compared to the prior year period.
Cost of Goods Sold. Cost of goods sold increased to 61.9% of revenue in the three months ended September 30, 2019 from 61.7% of revenue in the three months ended September 30, 2018 from 61.2% of revenue in the comparable prior year quarter. The increase in cost2018. Cost of goods sold increased 0.5% primarily due to inventory write-downs in our Europe segment as a percentagepart of revenue was primarilyour restructuring programs and 0.2% related to (i)other individually immaterial factors, partially offset by a 0.2% increase from0.5% improvement in gross margin in our North America segment and (ii)segment. We recorded a 0.2% increase attributable to mix. With$17 million reduction of inventory in our Stahlgruber acquisition, the lower margin Europe segment makes up a larger percentagerelated to U.K. branch consolidation and brand rationalization initiated as part of our restructuring programs. See Note 6, "Restructuring and Acquisition Related Expenses" to the unaudited condensed consolidated results and has a dilutive effectfinancial statements in Part I, Item 1 of this Quarterly Report on the gross margin percentage.Form 10-Q for further information on our restructuring plans. Refer to the discussion of our segment results of operations for factors contributing to the changes in cost of goods sold as a percentage of revenue by segment for the three months ended September 30, 20182019 compared to the three months ended September 30, 2017.2018.
Selling, General and Administrative Expenses. Our selling, general and administrative ("SG&A") expenses as a percentage of revenue remained atincreased to 28.3% in the three months ended September 30, 2019 from 28.2% forin the three months ended September 30, 2018, the same as the prior year period,primarily as a result of a 0.2% increase in SG&A expenses attributablefrom our North America segment, partially offset by a 0.2% decrease attributable tofrom our Europe segment, which was primarily related to our acquisition of Stahlgruber.Specialty segment. Refer to the discussion of our segment results of operations for factors contributing to the changes in SG&A expenses as a percentage of revenue by segment for the three months ended September 30, 20182019 compared to the three months ended September 30, 2017.2018.
Restructuring and Acquisition Related Expenses. The following table summarizes restructuring and acquisition related expenses for the periods indicated (in thousands):
| | | Three Months Ended | | | Three Months Ended | | |
| September 30, | | | September 30, | | |
| 2018 | | 2017 | | Change | 2019 | | 2018 | | Change |
Restructuring expenses | $ | 5,445 |
| (1) | $ | 1,545 |
| (2) | $ | 3,900 |
| $ | 7,284 |
| (1) | $ | 5,445 |
| (2) | $ | 1,839 |
|
Acquisition related expenses | 1,169 |
| (3) | 3,377 |
| (4) | (2,208 | ) | 1,645 |
| (3) | 1,169 |
| (4) | 476 |
|
Total restructuring and acquisition related expenses | $ | 6,614 |
| | $ | 4,922 |
| | $ | 1,692 |
| $ | 8,929 |
| | $ | 6,614 |
| | $ | 2,315 |
|
| |
(1) | Restructuring expenses for the three months ended September 30, 2019 primarily consisted of (i) $4 million related to our 2019 global restructuring program, and (ii) $3 million related to integration costs from acquisitions. |
| |
(2) | Restructuring expenses for the three months ended September 30, 2018 primarily consisted of $4 million related to the integration of our acquisition of Andrew Page and $1 million related to our Specialty segment. These integration activities included the closure of duplicate facilities and termination of employees. |
| |
(2)(3) | RestructuringAcquisition related expenses for the three months ended September 30, 2017 consisted of2019 included approximately $1 million for each of our Europe and Specialty segments, primarilycosts related to the integrationacquisition of acquired businessesan immaterial wholesale business in these segments. These integration activities included the closure of duplicate facilities and termination of employees.Europe. |
| |
(3)(4) | Acquisition related expenses for the quarter ended September 30, 2018 included $1 million of costs related to our acquisition of Stahlgruber. |
| |
(4) | Acquisition related expenses for the quarter ended September 30, 2017 included $2 million of costs for our acquisition of Andrew Page, primarily related to legal and other professional fees associated with the U.K. Competition and Markets Authority ("CMA") review. The remaining acquisition related costs for the quarter ended September 30, 2017 consisted of external costs for completed acquisitions and acquisitions that were pending as of September 30, 2017. |
See Note 6, "Restructuring and Acquisition Related Expenses" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our restructuring and integration plans.
Impairment of Net Assets Held for Sale. We recorded a $4 million net reversal of impairment charges on net assets held for sale in the third quarter of 2019 as the proceeds from our sales of two businesses exceeded our prior fair value estimates, resulting in a net reduction of previously reported impairment charges in the quarter. The net reversal of impairment charges was primarily attributable to our North America segment. See "Net Assets Held for Sale" in Note 4, "Financial Statement Information" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the net reversal of impairment charges.
Depreciation and Amortization. The following table summarizes depreciation and amortization for the periods indicated (in thousands):
| | | Three Months Ended | | | | Three Months Ended | | | |
| September 30, | | | | September 30, | | | |
| 2018 | | 2017 | | Change | | 2019 | | 2018 | | Change | |
Depreciation | $ | 34,775 |
| | $ | 31,179 |
| | $ | 3,596 |
| (1) | $ | 36,873 |
| | $ | 34,775 |
| | $ | 2,098 |
| (1) |
Amortization | 41,926 |
| | 25,698 |
| | 16,228 |
| (2) | 34,640 |
| | 41,926 |
| | (7,286 | ) | (2) |
Total depreciation and amortization | $ | 76,701 |
| | $ | 56,877 |
| | $ | 19,824 |
| | $ | 71,513 |
| | $ | 76,701 |
| | $ | (5,188 | ) | |
| |
(1) | The increaseDepreciation expense increased by $1 million in depreciation expenseeach of our North America and Europe segments, primarily reflected an increase of $3 million from our acquisition of Stahlgruber.driven by capital expenditures. |
| |
(2) | The increasedecrease in amortization expense primarily reflected an increase(i) decreases of $16$4 million fromand $2 million related to our acquisitionacquisitions of Stahlgruber.Stahlgruber and Rhiag, respectively, which had lower amortization expense during the three months ended September 30, 2019 compared to the prior year period as a result of the accelerated amortization on the customer relationship intangible assets, and (ii) a decrease of $1 million related to the impact of foreign currency translation, principally due to a decrease in the euro exchange rate during the three months ended September 30, 2019 compared to the prior year period. |
Other Expense, Net. The following table summarizes the components of the quarter-over-quarter increasechange in other expense, net (in thousands):
|
| | | | | |
Other expense, net for the three months ended September 30, 2017 | $ | 21,202 |
| |
Increase (decrease) due to: | | |
Interest expense, net | 15,638 |
| (1) |
Gains on bargain purchases | 913 |
| (2) |
Other expense (income), net | (3,852 | ) | (3) |
Net increase | 12,699 |
| |
Other expense, net for the three months ended September 30, 2018 | $ | 33,901 |
| |
|
| | | | | |
Other expense, net for the three months ended September 30, 2018 | $ | 33,901 |
| |
(Decrease) increase due to: | | |
Interest expense, net of interest income | (8,884 | ) | (1) |
Other income, net | 1,020 |
| (2) |
Net decrease | (7,864 | ) | |
Other expense, net for the three months ended September 30, 2019 | $ | 26,037 |
| |
| |
(1) | AdditionalThe decrease in interest is primarily related to higher outstanding debt during the third quarter of 2018(i) a $3 million decrease from lower interest rates on borrowings under our senior secured credit agreement compared to the prior year period, (including(ii) a $2 million decrease resulting from lower outstanding debt during the borrowings under our Euro Notes (2026/28)).three months ended September 30, 2019 compared to the prior year period, (iii) a $1 million decrease from foreign currency translation, primarily related to a decrease in the euro exchange rate during the three months ended September 30, 2019 compared to the prior year period, and (iv) several individually immaterial factors that decreased interest expense by $3 million in the aggregate. |
| |
(2) | In October 2016, we acquired Andrew Page out of receivership. We recorded a gain on bargain purchase of $8 million in the fourth quarter of 2016, as the fair value of the net assets acquired exceeded the purchase price. During the third quarter of 2017, we increased the gain on bargain purchase for this acquisition by $1 million as a result of changes to our estimate of the fair value of net assets acquired. |
| |
(3) | The increasedecrease in other income primarily consisted of a $3 million fair value gain recorded during the third quarter of 2018 related to a preferential rights issue to subscribe for new shares in Mekonomen at a discounted share price. See "Investments in Unconsolidated Subsidiaries" in Note 4, "Financial Statement Information" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. The remaining increasePartially offsetting the decrease was a $2 million favorable variance in other income was related to a number of individually insignificant fluctuations.foreign currency gains and losses. |
Provision for Income Taxes. Our effective income tax rate for the three months ended September 30, 2019 was 28.1%, compared to 22.9% for the comparable prior year period. The increase was primarily attributable to the impact of a favorable discrete item of $10 million for the three months ended September 30, 2018, compared to 32.7% for the three months ended September 30, 2017. The decrease was primarily attributable to the reduction of the U.S. federal statutory income tax rate from 35% to 21% as a result of the enactment of the Tax Act in December 2017. Partially offsetting this decrease was a 1.0% increase in the effective income tax rate as a result of the Stahlgruber acquisition, including non-deductible interest and acquisition related expenses, as well as the higher effective tax rate in Germany. We expect 0.6% of the increase to our effective tax rate to be non-recurring, as it relates to one-time financing and acquisition related costs for Stahlgruber. The effective tax rate also reflects the impact of favorable discrete items including (i) a $10 million favorablereflecting an adjustment to the Tax Act transition tax fortax. The increase was also partially attributable to the three months ended September 30, 2018 and (ii) approximately $1 million andimpact of an unfavorable adjustment of $2 million for the three months ended September 30, 2018 and 2017, respectively, for excess tax benefits from stock-based payments. The quarter over quarter change2019 due to an increase in these discrete items decreased the effectiveour annual estimated tax rate by 4.3% compared to the prior year. as a result of a shift in our projected geographic blend of earnings.
Equity in Earnings (Losses) Earnings of Unconsolidated Subsidiaries. Equity in earnings (losses) earnings of unconsolidated subsidiaries for the three months ended September 30, 20182019 and 20172018 primarily related to our investment in Mekonomen. During the three
months ended September 30, 2018, we recorded a $23 million other-than-temporary impairment related to our investment in Mekonomen. See "Investments in Unconsolidated Subsidiaries" in Note 4, "Financial Statement Information" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the impairment charge. The impairment charge is excluded from our calculation of Segment EBITDA. See Note 16, "Segment and Geographic Information" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for our reconciliation of Net Income to Segment EBITDA.
Foreign Currency Impact. We translate our statements of income at the average exchange rates in effect for the period. Relative to the rates used during the three months ended September 30, 2017,2018, the Canadian dollar, euro, and pound sterling, Czech koruna, and euro rates used to translate the 20182019 statements of income decreased by 4.1%5.4%, 1.0%4.4%, and 0.5%4.4%, respectively, and the Czech koruna rate increased by 0.3%, compared to the prior year period.respectively. The negative translation effect of the change in foreign currencies against the U.S. dollar andnetted against the positive impact of realized and unrealized currency gains and losses for the three months ended September 30, 2018 resulted2019, resulting in a negative effect of less than half a pennyan immaterial impact on diluted earnings per share from continuing operations relative to the prior year third quarter.period.
Net (Loss) Income Attributable to Continuing and Discontinued Noncontrolling Interest. Net (loss) income attributable to continuing noncontrolling interest for the three months ended September 30, 2019 decreased an immaterial amount compared to the three months ended September 30, 2018 primarily relateddue to the noncontrolling interest of subsidiaries acquired in connection withan immaterial subsidiary. Net income attributable to discontinued noncontrolling interest was immaterial for the three months ended September 30, 2019 and related to the Stahlgruber acquisition. We reported no income or loss attributableCzech Republic wholesale business. See Note 3, "Discontinued Operations" to the noncontrolling interestunaudited condensed consolidated financial statements in the prior year period.Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on this business.
Nine Months Ended September 30, 20182019 Compared to Nine Months Ended September 30, 20172018
Revenue. The following table summarizes the changes in revenue by category (in thousands):
| | | Nine Months Ended | | | Nine Months Ended | | |
| September 30, | | Percentage Change in Revenue | September 30, | | Percentage Change in Revenue |
| 2018 | | 2017 | | Organic | | Acquisition | | Foreign Exchange | | Total Change | 2019 | | 2018 | | Organic | | Acquisition | | Foreign Exchange | | Total Change |
Parts & services revenue | $ | 8,379,337 |
| | $ | 6,872,581 |
| | 5.1 | % | | 14.3 | % | | 2.5 | % | | 21.9 | % | $ | 9,021,790 |
| | $ | 8,379,337 |
| | 0.1 | % | | 10.2 | % | | (2.7 | )% | | 7.7 | % |
Other revenue | 494,556 |
| | 394,473 |
| | 23.9 | % | | 1.5 | % | | 0.1 | % | | 25.4 | % | 474,459 |
| | 494,556 |
| | (5.0 | )% | | 1.2 | % | | (0.3 | )% | | (4.1 | )% |
Total revenue | $ | 8,873,893 |
| | $ | 7,267,054 |
| | 6.1 | % | | 13.6 | % | | 2.4 | % | | 22.1 | % | $ | 9,496,249 |
| | $ | 8,873,893 |
| | (0.1 | )% | | 9.7 | % | | (2.5 | )% | | 7.0 | % |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
The changegrowth in parts and services revenue of 21.9%7.7% represented increases in segment revenue of 7.5%16.3% in Europe (driven by the Stahlgruber acquisition), 0.6% in North America 42.2% in Europe and 14.5%0.5% in Specialty. The increasedecrease in other revenue of 25.4%4.1% was primarily driven by a $94$25 million organic increase,decrease, largely attributable to our North America segment. Refer to the discussion of our segment results of operations for factors contributing to the change in revenue by segment during the first nine months ended September 30, 2018of 2019 compared to the prior year period.
Cost of Goods Sold. Cost of goods sold increased to 61.5% of revenuewas flat in the nine months ended September 30, 2018 from 60.8% of revenue in2019 compared to the comparable prior year period. CostOur North America segment generated a 0.5% improvement in gross margin, which was offset by (i) a 0.2% increase in cost of goods sold increased 0.5%attributable to mix, (ii) an increase of 0.2% primarily due to inventory write-downs in our Europe segment, and 0.4% as(iii) an increase of 0.2% attributable to our Specialty segment. The mix impact is a result of our Stahlgruber acquisition, as the lower margin Europe segment makes up a larger percentage of the consolidated results and North America segments, respectively.has a dilutive effect on the gross margin percentage. We recorded a $17 million reduction of inventory in our Europe segment related to U.K. branch consolidation and brand rationalization initiated as part of our restructuring program. See Note 6, "Restructuring and Acquisition Related Expenses" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our restructuring plans. Refer to the discussion of our segment results of operations for factors contributing to the changes in cost of goods sold as a percentage of revenue by segment for the nine months ended September 30, 20182019 compared to the nine months ended September 30, 2017.2018.
Selling, General and Administrative Expenses. Our SG&A expenses as a percentage of revenue increased to 28.3% in the nine months ended September 30, 2019 from 27.9% in the nine months ended September 30, 2018, from 27.6% in the nine months ended September 30, 2017, primarily as a result of a 0.3% and 0.2% increase from our Europe and North America segment.segments, respectively. Refer to the discussion of our segment results of operations for factors contributing to the changes in SG&A expenses as a percentage of revenue by segment for the nine months ended September 30, 20182019 compared to the nine months ended September 30, 2017.2018.
Restructuring and Acquisition Related Expenses. The following table summarizes restructuring and acquisition related expenses for the periods indicated (in thousands):
| | | Nine Months Ended | | | Nine Months Ended | | |
| September 30, | | | September 30, | | |
| 2018 | | 2017 | | Change | 2019 | | 2018 | | Change |
Restructuring expenses | $ | 9,577 |
| (1) | $ | 2,241 |
| (2) | $ | 7,336 |
| $ | 18,482 |
| (1) | $ | 9,577 |
| (2) | $ | 8,905 |
|
Acquisition related expenses | 16,969 |
| (3) | 8,130 |
| (4) | 8,839 |
| 2,131 |
| (3) | 16,969 |
| (4) | (14,838 | ) |
Total restructuring and acquisition related expenses | $ | 26,546 |
| | $ | 10,371 |
| | $ | 16,175 |
| $ | 20,613 |
| | $ | 26,546 |
| | $ | (5,933 | ) |
| |
(1) | Restructuring expenses for the nine months ended September 30, 2019 primarily consisted of (i) $10 million related to our 2019 global restructuring program, and (ii) $9 million related to integration costs from acquisitions. |
| |
(2) | Restructuring expenses for the nine months ended September 30, 2018 primarily consisted of $8 million related to the integration of our acquisition of Andrew Page and $2 million related to our Specialty segment. These integration activities included the closure of duplicate facilities and termination of employees. |
| |
(2)(3) | RestructuringAcquisition related expenses of $1 million in each of our Specialty and Europe segments for the nine months ended September 30, 2017 were primarily2019 included approximately $1 million of costs related to the integrationacquisition of acquired businessesan immaterial wholesale business in these segments. These integration activities included the closure of duplicate facilities and termination of employees.Europe. |
| |
(3)(4) | Acquisition related expenses for the nine months ended September 30, 2018 primarily consisted of $15 million of costs for our acquisition of Stahlgruber. The remaining costs related to other completed acquisitions and acquisitions that were pending as of September 30, 2018. |
| |
(4) | Acquisition related expenses for the nine months ended September 30, 2017 included $4 million of costs for our acquisition of Andrew Page, primarily related to legal and other professional fees associated with the CMA review. The remaining acquisition related costs for the nine months ended September 30, 2017 consisted of external costs for completed acquisitions and acquisitions that were pending as of September 30, 2017. |
See Note 6, "Restructuring and Acquisition Related Expenses" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our restructuring and integration plans.
Depreciation and Amortization. The following table summarizes depreciation and amortizationImpairment of Net Assets Held for the periods indicated (in thousands):
|
| | | | | | | | | | | | |
| Nine Months Ended | | | |
| September 30, | | | |
| 2018 | | 2017 | | Change | |
Depreciation | $ | 100,576 |
| | $ | 85,547 |
| | $ | 15,029 |
| (1) |
Amortization | 95,746 |
| | 73,631 |
| | 22,115 |
| (2) |
Total depreciation and amortization | $ | 196,322 |
| | $ | 159,178 |
| | $ | 37,144 |
| |
| |
(1) | The increase in depreciation expense primarily reflected an increase of $13 million in our Europe segment, composed of (i) $5 million of incremental depreciation expense from our acquisition of Stahlgruber, (ii) a $3 million increase due to a measurement period adjustment recorded in the first nine months of 2017 related to our valuation procedures for our acquisition of Rhiag that reduced depreciation expense, (iii) $3 million of incremental depreciation expense from our acquisitions of aftermarket parts distribution businesses in Belgium and Poland in the third quarter of 2017, and (iv) a $2 million increase related to the impact of foreign currency translation, primarily due to increases in the pound sterling, euro, and Czech koruna exchange rates during the first nine months of 2018 compared to the prior year period. |
| |
(2) | The increase in amortization expense primarily reflected (i) an increase of $22 million from our acquisition of Stahlgruber, and (ii) an increase of $3 million from our acquisition of Warn, partially offset by (iii) individually insignificant fluctuations in amortization expense across our other businesses that netted to a $3 million decrease. |
Other Expense, Net. The following table summarizes the components of the year-over-year increase in other expense,Sale. We recorded a $45 million impairment charge on net (in thousands):
|
| | | | | |
Other expense, net for the nine months ended September 30, 2017 | $ | 62,932 |
| |
Increase (decrease) due to: | | |
Interest expense, net | 33,841 |
| (1) |
Gains on bargain purchases | 3,662 |
| (2) |
Other expense (income), net | (2,202 | ) | (3) |
Net increase | 35,301 |
| |
Other expense, net for the nine months ended September 30, 2018 | $ | 98,233 |
| |
| |
(1) | Additional interest primarily related to (i) an $26 million increase resulting from higher outstanding debt during the first nine months of 2018 compared to the prior year period (including the borrowings under our Euro Notes (2026/28)), (ii) a $5 million increase from higher interest rates on borrowings under our senior secured credit |
agreement compared to the prior year, and (iii) a $3 million increase from foreign currency translation, primarily related to an increase in the euro exchange rate during the first nine months of 2018 compared to the prior year period.
| |
(2) | In October 2016, we acquired Andrew Page out of receivership. We recorded a gain on bargain purchase of $8 million in the fourth quarter of 2016, as the fair value of the net assets acquired exceeded the purchase price. During 2017, we increased the gain on bargain purchase for this acquisition by $3 million as a result of changes to our estimate of the fair value of net assets acquired. We also recorded a gain on bargain purchase for another acquisition in Europe completed in the second quarter of 2017, as the fair value of the net assets acquired exceeded the purchase price. In the second quarter of 2018, we increased the gain on bargain purchase for this acquisition by an immaterial amount. |
| |
(3) | The increase in other income primarily consisted of (i) a $3 million fair value gain recorded during the third quarter of 2018 related to a preferential rights issue to subscribe for new shares at a discounted share price for our equity method investment in Mekonomen; see Note 4, "Financial Statement Information" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information, and (ii) a $2 million increase in other miscellaneous income, partially offset by (iii) a $3 million increase in foreign currency losses. |
Provisionassets held for Income Taxes. Our effective income tax rate was 25.2%sale for the nine months ended September 30, 2018, compared to 33.5% for the nine months ended September 30, 2017.2019. The decreaseimpairment charge was primarily attributable to the reduction of the U.S. federal statutory income tax rate from 35% to 21% as a result of the enactment of the Tax Actour North America segment. See "Net Assets Held for Sale" in December 2017. Partially offsetting this decrease was a 1.0% increase in the effective income tax rate as a result of the Stahlgruber acquisition, including non-deductible interest and acquisition related expenses, as well as the higher effective tax rate in Germany. The effective tax rate also reflects the impact of net favorable discrete items of approximately $12 million and $8 million for the nine months ended September 30, 2018 and 2017, respectively. The net favorable discrete items are primarily composed of a $10 million favorable adjustment to the Tax Act transition tax for the nine months ended September 30, 2018, as well as $4 million and $7 million for the nine months ended September 30, 2018 and 2017, respectively, for excess tax benefits from stock-based payments. The year over year change in discrete items decreased the effective tax rate by 0.6% compared to the prior year.
Equity in (Losses) Earnings of Unconsolidated Subsidiaries. Equity in (losses) earnings of unconsolidated subsidiaries for the nine months ended September 30, 2018 and 2017 primarily related to our investment in Mekonomen. During the nine months ended September 30, 2018, we recorded a $23 million other-than-temporary impairment related to our investment in Mekonomen. See Note 4, "Financial Statement Information" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the impairment charge.
Depreciation and Amortization. The following table summarizes depreciation and amortization for the periods indicated (in thousands):
|
| | | | | | | | | | | | |
| Nine Months Ended | | | |
| September 30, | | | |
| 2019 | | 2018 | | Change | |
Depreciation | $ | 109,245 |
| | $ | 100,576 |
| | $ | 8,669 |
| (1) |
Amortization | 104,104 |
| | 95,746 |
| | 8,358 |
| (2) |
Total depreciation and amortization | $ | 213,349 |
| | $ | 196,322 |
| | $ | 17,027 |
| |
| |
(1) | Depreciation expense included an incremental $5 million in our Europe segment, principally due to (i) an $8 million increase in depreciation expense from our acquisition of Stahlgruber, partially offset by (ii) a decrease of $3 million related to the impact of foreign currency translation, primarily due to decreases in the euro and pound sterling exchange rates during the nine months ended September 30, 2019 compared to the prior year period. Depreciation expense also included an incremental $4 million in our North America segment, primarily due to capital expenditures related to new warehouse openings and upgrades to our existing information technology infrastructure. |
| |
(2) | The increase in amortization expense primarily reflected (i) an incremental $18 million from our acquisition of Stahlgruber, partially offset by (ii) a decrease of $5 million related to the impact of foreign currency translation, principally due to a decrease in the euro exchange rate during the nine months ended September 30, 2019 compared to the prior year period, and (iii) a decrease of $5 million related to our 2016 acquisition of Rhiag, which had lower amortization expense during the nine months ended September 30, 2019 compared to the prior year period as a result of the accelerated amortization on the customer relationship intangible asset. |
Other Expense, Net. The following table summarizes the components of the change in other expense, net (in thousands):
|
| | | | | |
Other expense, net for the nine months ended September 30, 2018 | $ | 98,233 |
| |
Decrease due to: | | |
Interest expense, net of interest income | (3,698 | ) | (1) |
Other income, net | (6,109 | ) | (2) |
Net decrease | (9,807 | ) | |
Other expense, net for the nine months ended September 30, 2019 | $ | 88,426 |
| |
| |
(1) | The decrease in interest is primarily related to (i) a $7 million decrease from lower interest rates on borrowings under our senior secured credit agreement compared to the prior year period, and (ii) a $4 million decrease from foreign currency translation, primarily related to a decrease in the euro exchange rate during the first nine months of 2019 compared to the prior year period, partially offset by (iii) an $8 million increase resulting from higher outstanding debt during the nine months ended September 30, 2019 compared to the prior year period (including the borrowings under our Euro Notes (2026/28)). |
| |
(2) | The increase in other income primarily consisted of (i) a $4 million favorable variance in foreign currency gains and losses, and (ii) $3 million of proceeds received in the first quarter of 2019 related to an insurance settlement in our North America segment. |
Provision for Income Taxes. Our effective income tax rate for the nine months ended September 30, 2019 was 27.5%, compared to 25.2% for the comparable prior year period. The increase was primarily attributable to the impact of a favorable discrete item of $10 million for the nine months ended September 30, 2018, reflecting an adjustment to the Tax Act transition tax. The increase was also partially attributable to the impact of a favorable discrete item of approximately $4 million for the nine months ended September 30, 2018, for excess tax benefits from stock-based payments; there were $1 million of excess tax benefits from stock-based payments for the nine months ended September 30, 2019. The year over year change for these discrete items increased the effective tax rate by 2.1% compared to the prior year period, while remaining discrete items increased the effective tax rate by an immaterial amount compared to the prior year period.
Equity in Earnings (Losses) of Unconsolidated Subsidiaries. Equity in earnings (losses) of unconsolidated subsidiaries for the nine months ended September 30, 2019 primarily related to our investment in Mekonomen. During the three months ended March 31, 2019 and September 30, 2018, we recognized other-than-temporary impairment charge is excluded fromcharges of $40 million and $23 million, respectively, related to our calculation of Segment EBITDA.investment in Mekonomen. See "Investments in Unconsolidated Subsidiaries" in Note 16, "Segment and Geographic4, "Financial Statement Information" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for our reconciliation of Net Income to Segment EBITDA.further information on the impairment charge.
Foreign Currency Impact. We translate our statements of income at the average exchange rates in effect for the period. Relative to the rates used during the nine months ended September 30, 2017,2018, the Czech koruna, euro, pound sterling and Canadian dollar rates used to translate the 20182019 statements of income increaseddecreased by 11.2%, 7.2%6.4%, 5.9%, 5.8% and 1.4%3.2%, respectively. The negative translation effect of the change in foreign currencies against the U.S. dollar andnetted against the positive impact of realized and unrealized currency gains and losses for the nine months ended September 30, 20182019 resulted in a $0.02 positivenegative effect on diluted earnings per share from continuing operations relative to the first nine months of the prior year.
Net Loss from Discontinued Operations. During the nine months ended September 30, 2017, we recorded a net loss from discontinued operations totaling $5 million; we had no discontinued operations in the current year period. Discontinued operations for 2017 represents the automotive glass manufacturing business of PGW, which we sold on March 1, 2017.
Net (Loss) Income Attributable to Continuing and Discontinued Noncontrolling Interest. Net (loss) income attributable to continuing noncontrolling interest for the nine months ended September 30, 2019 increased $1 million compared to the nine months ended September 30, 2018 primarily relateddue to the noncontrolling interest of subsidiaries acquired in connection with the Stahlgruber acquisition. We reported noNet income or loss attributable to thediscontinued noncontrolling interest as immaterial for the nine months ended September 30, 2019 and related to the Stahlgruber Czech Republic wholesale business. See Note 3, "Discontinued Operations" to the unaudited condensed consolidated financial statements in the prior year period.
Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on this business.
Results of Operations—Segment Reporting
We have four operating segments: Wholesale – North America, Europe, Specialty and Self Service. Our Wholesale – North America and Self Service operating segments are aggregated into one reportable segment, North America, because they possess similar economic characteristics and have common products and services, customers, and methods of distribution. Therefore, we present three reportable segments: North America, Europe and Specialty.
We have presented the growth of our revenue and profitability in our operations on both an as reported and a constant currency basis. The constant currency presentation, which is a non-GAAP measure, excludes the impact of fluctuations in
foreign currency exchange rates. We believe providing constant currency information provides valuable supplemental information regarding our growth and profitability, consistent with how we evaluate our performance, as this statistic removes the translation impact of exchange rate fluctuations, which are outside of our control and do not reflect our operational performance. Constant currency revenue and Segment EBITDA results are calculated by translating prior year revenue and Segment EBITDA in local currency using the current year's currency conversion rate. This non-GAAP financial measure has important limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP. Our use of this term may vary from the use of similarly-titled measures by other issuers due to potential inconsistencies in the method of calculation and differences due to items subject to interpretation. In addition, not all companies that report revenue or profitability on a constant currency basis calculate such measures in the same manner as we do, and accordingly, our calculations are not necessarily comparable to similarly-named measures of other companies and may not be appropriate measures for performance relative to other companies.
The following table presents our financial performance, including third party revenue, total revenue and Segment EBITDA, by reportable segment for the periods indicated (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | % of Total Segment Revenue | | 2017 | | % of Total Segment Revenue | | 2018 | | % of Total Segment Revenue | | 2017 | | % of Total Segment Revenue | 2019 | | % of Total Segment Revenue | | 2018 | | % of Total Segment Revenue | | 2019 | | % of Total Segment Revenue | | 2018 | | % of Total Segment Revenue |
Third Party Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
North America | $ | 1,262,657 |
| | | | $ | 1,181,756 |
| | | | $ | 3,927,282 |
| | | | $ | 3,596,108 |
| | | $ | 1,302,086 |
| | | | $ | 1,262,657 |
| | | | $ | 3,925,962 |
| | | | $ | 3,927,282 |
| | |
Europe | 1,470,856 |
| | | | 954,522 |
| | | | 3,795,439 |
| | | | 2,665,170 |
| | | 1,451,483 |
| | | | 1,470,856 |
| | | | 4,413,264 |
| | | | 3,795,439 |
| | |
Specialty | 388,865 |
| | | | 329,522 |
| | | | 1,151,172 |
| | | | 1,005,776 |
| | | 394,204 |
| | | | 388,865 |
| | | | 1,157,023 |
| | | | 1,151,172 |
| | |
Total third party revenue | $ | 3,122,378 |
| | | | $ | 2,465,800 |
| | | | $ | 8,873,893 |
| | | | $ | 7,267,054 |
| | | $ | 3,147,773 |
| | | | $ | 3,122,378 |
| | | | $ | 9,496,249 |
| | | | $ | 8,873,893 |
| | |
Total Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
North America | $ | 1,262,799 |
| | | | $ | 1,181,943 |
| | | | $ | 3,927,808 |
| | | | $ | 3,596,697 |
| | | $ | 1,302,147 |
| | | | $ | 1,262,799 |
| | | | $ | 3,926,222 |
| | | | $ | 3,927,808 |
| | |
Europe | 1,470,856 |
| | | | 954,522 |
| | | | 3,795,439 |
| | | | 2,665,170 |
| | | 1,451,483 |
| | | | 1,470,856 |
| | | | 4,413,264 |
| | | | 3,795,439 |
| | |
Specialty | 390,061 |
| | | | 330,594 |
| | | | 1,154,726 |
| | | | 1,008,998 |
| | | 395,314 |
| | | | 390,061 |
| | | | 1,160,687 |
| | | | 1,154,726 |
| | |
Eliminations | (1,338 | ) | | | | (1,259 | ) | | | | (4,080 | ) | | | | (3,811 | ) | | | (1,171 | ) | | | | (1,338 | ) | | | | (3,924 | ) | | | | (4,080 | ) | | |
Total revenue | $ | 3,122,378 |
| | | | $ | 2,465,800 |
| | | | $ | 8,873,893 |
| | | | $ | 7,267,054 |
| | | $ | 3,147,773 |
| | | | $ | 3,122,378 |
| | | | $ | 9,496,249 |
| | | | $ | 8,873,893 |
| | |
Segment EBITDA | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
North America | $ | 154,049 |
| | 12.2 | % | | $ | 152,627 |
| | 12.9 | % | | $ | 506,772 |
| | 12.9 | % | | $ | 502,494 |
| | 14.0 | % | $ | 166,310 |
| | 12.8 | % | | $ | 154,049 |
| | 12.2 | % | | $ | 532,994 |
| | 13.6 | % | | $ | 506,772 |
| | 12.9 | % |
Europe | 129,358 |
| | 8.8 | % | | 79,294 |
| | 8.3 | % | | 315,785 |
| | 8.3 | % | | 241,537 |
| | 9.1 | % | 124,712 |
| | 8.6 | % | | 129,358 |
| | 8.8 | % | | 346,291 |
| | 7.8 | % | | 315,785 |
| | 8.3 | % |
Specialty | 42,937 |
| | 11.0 | % | | 35,114 |
| | 10.6 | % | | 140,974 |
| | 12.2 | % | | 119,133 |
| | 11.8 | % | 45,464 |
| | 11.5 | % | | 42,937 |
| | 11.0 | % | | 135,790 |
| | 11.7 | % | | 140,974 |
| | 12.2 | % |
The key measure of segment profit or loss reviewed by our chief operating decision maker, who is our Chief Executive Officer, is Segment EBITDA. Segment EBITDA includes revenue and expenses that are controllable by the segment. Corporate general and administrative expenses are allocated to the segments based on usage, with shared expenses apportioned based on the segment's percentage of consolidated revenue. We calculate Segment EBITDA as EBITDA excluding restructuring and acquisition related expenses (which includes restructuring expenses recorded in Cost of goods sold), change in fair value of contingent consideration liabilities, other gains and losses related to acquisitions, equity method investments, or divestitures, and equity in losses and earnings of unconsolidated subsidiaries.subsidiaries, and impairment charges. EBITDA, which is the basis for Segment EBITDA, is calculated as net income, excludingless net income (loss) attributable to continuing and discontinued noncontrolling interest, excluding discontinued operations and discontinued noncontrolling interest, depreciation, amortization, interest (which includes gains and losses on debt extinguishment) and income tax expense. See Note 16, "Segment and Geographic Information"Information" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of total Segment EBITDA to net income.
Three Months Ended September 30, 20182019 Compared to Three Months Ended September 30, 20172018
North America
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our North America segment (in thousands):
| | | Three Months Ended September 30, | | Percentage Change in Revenue | Three Months Ended September 30, | | Percentage Change in Revenue |
North America | 2018 | | 2017 | | Organic | | Acquisition (3) | | Foreign Exchange | | Total Change | 2019 | | 2018 | | Organic | | Acquisition (3) | | Foreign Exchange | | Total Change |
Parts & services revenue | $ | 1,109,067 |
| | $ | 1,051,470 |
| | 5.2 | % | (1 | ) | 0.5 | % | | (0.3 | )% | | 5.5 | % | $ | 1,145,402 |
| | $ | 1,109,067 |
| | 2.9 | % | (1 | ) | 0.4 | % | | (0.1 | )% | | 3.3 | % |
Other revenue | 153,590 |
| | 130,286 |
| | 18.0 | % | (2 | ) | 0.0 | % | | (0.1 | )% | | 17.9 | % | 156,684 |
| | 153,590 |
| | 0.9 | % | (2 | ) | 1.1 | % | | (0.0 | )% | | 2.0 | % |
Total third party revenue | $ | 1,262,657 |
| | $ | 1,181,756 |
| | 6.6 | % | | 0.5 | % | | (0.3 | )% | | 6.8 | % | $ | 1,302,086 |
| | $ | 1,262,657 |
| | 2.7 | % | | 0.5 | % | | (0.1 | )% | | 3.1 | % |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | Organic growth in partsParts and services organic revenue increased 1.4% on a per day basis. This per day increase was largely attributable to (i) favorable pricing, and, to a lesser extent, increasedpartially offset by sales volumes in our wholesale operations. The volume increases were primarily driven by incremental sales relatedoperations, and (ii) higher revenue in our aviation business prior to an agreement signedits disposal in December 2017 for the distribution of batteries.August. |
| |
(2) | The $23$1 million year over year organic increase in other revenue primarily related to (i) a $12$19 million increase in revenue from scrap steel and otherprecious metals related to approximately equal impacts from higher prices and increased volumes year over year, (ii) a $4 million increase in core revenue primarily related to increased volumes year over year, and (iii) a $4 million increase in revenue from metals found in catalytic converters (platinum, palladium and rhodium) primarily due to higher prices and, to a lesser extent, increased volumes, year over year.partially offset by (i) a $13 million decrease in revenue from scrap steel and other metals primarily related to lower prices, partially offset by increased volumes, (ii) a $2 million decrease in core revenue primarily related to decreased volumes, and (iii) several individually immaterial factors that decreased organic revenue by $2 million in the aggregate. |
| |
(3) | Acquisition related growth in the third quarter of 20182019 reflected revenue from our acquisition of four wholesale businesses fromand one self service business since the beginning of the third quarter of 2017 up to2018 through the one-year anniversary of the acquisition dates.acquisitions. |
Segment EBITDA. Segment EBITDA increased $1$12 million, or 0.9%8.0%, in the third quarter of 20182019 compared to the third quarter of the prior year third quarter.year. Sequential decreases in scrap steel prices in our salvage and self service operations had an unfavorable impact of $7$8 million on North America Segment EBITDA during the three months ended September 30, 2019, compared to a $7 million unfavorable impact on the three months ended September 30, 2018. This unfavorable impact for the three months ended September 30, 2019 resulted from the decrease in scrap steel prices between the date we purchased a vehicle, which influences the price we pay for a vehicle, and the date we scrapped a vehicle, which influences the price we receive for scrapping a vehicle.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our North America segment:
|
| | | | |
North America | | Percentage of Total Segment Revenue | |
Segment EBITDA for the three months ended September 30, 2018 | | 12.2 | % | |
Increase (decrease) due to: | | | |
Change in gross margin | | 1.0 | % | (1) |
Change in segment operating expenses | | (0.5 | )% | (2) |
Change in other expense, net and net income attributable to continuing noncontrolling interest | | 0.0 | % | |
Segment EBITDA for the three months ended September 30, 2019 | | 12.8 | % | |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The increase in gross margin primarily reflected a favorable impact of 1.1% from our wholesale operations. The increase in wholesale gross margin was primarily attributable to ongoing margin initiatives. |
| |
(2) | Segment operating expenses increased as a percentage of revenue. Having one additional selling day in the third quarter of 2019 resulted in a positive leverage effect, but there were several offsetting factors that increased expenses compared to the prior year period. The increase in segment operating expenses was primarily due to (i) a 0.5% increase in incentive compensation expenses compared to the prior year, principally due to downward revisions of the bonus accruals in the third quarter of 2018 and upward revisions in the third quarter of 2019 as a result of our |
performance in each period, and (ii) a 0.4% increase in facility expenses principally due to higher expenses in rent related to expansions and renewals, partially offset by (iii) a 0.3% decrease from other personnel-related costs, including salaries and wages and non-incentive benefits, primarily due to reduced headcount and lower insurance claims.
Europe
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our Europe segment (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Percentage Change in Revenue |
Europe | 2019 | | 2018 | | Organic (1) | | Acquisition (2) | | Foreign Exchange (3) | | Total Change |
Parts & services revenue | $ | 1,446,392 |
| | $ | 1,464,049 |
| | 2.1 | % | | 1.3 | % | | (4.6 | )% | | (1.2 | )% |
Other revenue | 5,091 |
| | 6,807 |
| | (19.4 | )% | | (0.3 | )% | | (5.6 | )% | | (25.2 | )% |
Total third party revenue | $ | 1,451,483 |
| | $ | 1,470,856 |
| | 2.0 | % | | 1.3 | % | | (4.6 | )% | | (1.3 | )% |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The parts and services organic revenue growth for the quarter was affected by having one additional selling day. Selling days differ by market, but, on average, we had one additional selling day in our Europe segment in the third quarter of 2019 than in the prior year period. On a per day basis, organic parts and services revenue increased 0.7%, mainly driven by our U.K. and Eastern European operations. Softer economic conditions continue to have a negative impact on revenue growth, most notably in Italy and Germany. |
| |
(2) | Acquisition related growth for the three months ended September 30, 2019 was $19 million, or 1.3%, due to our acquisition of eight wholesale businesses since the beginning of the third quarter of 2018 through the one year anniversary of the acquisitions. |
| |
(3) | Compared to the prior year, exchange rates decreased our revenue growth by $68 million, or 4.6%, primarily due to the stronger U.S. dollar against the euro, pound sterling and Czech koruna during the third quarter of 2019 relative to the prior year period. |
Segment EBITDA. Segment EBITDA decreased $5 million, or 3.6%, in the third quarter of 2019 compared to the prior year period. Our Europe Segment EBITDA included a negative year over year impact of $6 million related to the translation of local currency results into U.S. dollars at lower exchange rates than those experienced during the third quarter of 2018. On a constant currency basis (i.e. excluding the translation impact), Segment EBITDA increased by $1 million, or 1.0%, compared to the prior year. Refer to the Foreign Currency Impact discussion within the Results of Operations–Consolidated section above for further detail regarding foreign currency impact on our results for the three months ended September 30, 2019.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Europe segment:
|
| | | | |
Europe | | Percentage of Total Segment Revenue | |
Segment EBITDA for the three months ended September 30, 2018 | | 8.8 | % | |
(Decrease) increase due to: | | | |
Change in gross margin | | (0.1 | )% | (1) |
Change in segment operating expenses | | (0.3 | )% | (2) |
Change in other expense, net and net income attributable to continuing noncontrolling interest | | 0.1 | % | |
Segment EBITDA for the three months ended September 30, 2019 | | 8.6 | % | |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The decrease in gross margin was primarily due to a 0.5% unfavorable impact related to our Central European operations, principally due to lower prices and product mix, partially offset by a favorable increase of 0.3% in supplier |
rebates as a result of centralized procurement for our Europe segment, principally driven by our acquisition of Stahlgruber, and a 0.2% increase related to our U.K. operations.
| |
(2) | The increase in segment operating expenses as a percentage of revenue was primarily due to a 0.3% increase in personnel expenses, principally as a result of the timing of bonus accrual revisions and the negative leverage effect driven by lower sales growth compared to average wage inflation. Transformation expenses related to the 1 LKQ Europe program had an unfavorable impact of 0.1% on the three months ended September 30, 2019 compared to the prior year period. |
Specialty
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our Specialty segment (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Percentage Change in Revenue |
Specialty | 2019 | | 2018 | | Organic (1) | | Acquisition | | Foreign Exchange | | Total Change |
Parts & services revenue | $ | 394,204 |
| | $ | 388,865 |
| | 1.5 | % | | — | % | | (0.1 | )% | | 1.4 | % |
Other revenue | — |
| | — |
| | — | % | | — | % | | — | % | | — | % |
Total third party revenue | $ | 394,204 |
| | $ | 388,865 |
| | 1.5 | % | | — | % | | (0.1 | )% | | 1.4 | % |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | Organic growth in parts and services revenue was primarily due to an additional selling day in the third quarter of 2019 compared to the prior year period (organic revenue declined 0.1% on a per day basis). Modest volume growth in our RV business in the U.S. was offset by decreased sales volumes in our Canada operations compared to the prior year period, principally due to softening economic conditions. |
Segment EBITDA. Segment EBITDA increased $3 million, or 5.9%, in the third quarter of 2019 compared to the prior year third quarter.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Specialty segment:
|
| | | | |
Specialty | | Percentage of Total Segment Revenue | |
Segment EBITDA for the three months ended September 30, 2018 | | 11.0 | % | |
(Decrease) increase due to: | | | |
Change in gross margin | | (0.8 | )% | (1) |
Change in segment operating expenses | | 1.3 | % | (2) |
Segment EBITDA for the three months ended September 30, 2019 | | 11.5 | % | |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The decrease in gross margin reflects unfavorable impacts of (i) 0.4% due to unfavorable product mix in the third quarter of 2019, (ii) 0.2% of higher product costs, primarily due to lower supplier discounts resulting from lower purchase volumes, and (iii) several individually immaterial factors that had an unfavorable impact of 0.2% in the aggregate. |
| |
(2) | The decrease in segment operating expenses reflects favorable impacts of (i) 0.7% in personnel costs primarily due to reduced headcount, (ii) 0.4% in freight, vehicle and fuel expenses due to a decreased use of third party freight, and (iii) 0.2% due to several individually immaterial factors. |
Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
North America
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our North America segment (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Percentage Change in Revenue |
North America | 2019 | | 2018 | | Organic | | Acquisition (3) | | Foreign Exchange | | Total Change |
Parts & services revenue | $ | 3,466,582 |
| | $ | 3,447,074 |
| | 0.4 | % | (1 | ) | 0.4 | % | | (0.2 | )% | | 0.6 | % |
Other revenue | 459,380 |
| | 480,208 |
| | (5.0 | )% | (2 | ) | 0.7 | % | | (0.1 | )% | | (4.3 | )% |
Total third party revenue | $ | 3,925,962 |
| | $ | 3,927,282 |
| | (0.3 | )% | | 0.5 | % | | (0.2 | )% | | (0.0 | )% |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | Parts and services organic revenue increased 0.4% in the first nine months of 2019 compared to the prior year period. This relatively low growth rate was impacted by (i) lower revenue in our glass and aviation businesses, which had unfavorable effects on organic growth of 0.4% and 0.3%, respectively, and (ii) collision and liability related auto claims being 1.6% lower in the first nine months of 2019 compared to the prior year period, which adversely impacted volume in our wholesale operations. Additionally, our North America segment generated a 6.4% organic growth rate for parts and services revenue in the first nine months of 2018, due in part to severe winter weather conditions. Facing a strong comparable period and with less favorable weather conditions in the first half of 2019, organic parts and services revenue growth was below our historical average. |
| |
(2) | The $24 million year over year organic decrease in other revenue primarily related to (i) a $46 million decrease in revenue from scrap steel and other metals primarily related to lower prices, partially offset by increased volumes, and (ii) an $11 million decrease in core revenue primarily related to decreased volumes, partially offset by (iii) a $35 million increase in revenue from precious metals (platinum, palladium and rhodium) primarily due to higher prices. |
| |
(3) | Acquisition related growth in the first nine months of 2019 reflected revenue from our acquisition of five wholesale businesses and one self service business from the beginning of 2018 through the one-year anniversary of the acquisitions. |
Segment EBITDA. Segment EBITDA increased $26 million, or 5.2%, in the first nine months of 2019 compared to the prior year period. Sequential decreases in scrap steel prices in our salvage and self service operations had an unfavorable impact of $14 million on North America Segment EBITDA for the first nine months of 2019, compared to a $2$10 million positive impact on the third quarterfirst nine months of 2017.2018. This unfavorable impact resulted from the decrease in scrap steel prices between the date we purchased a vehicle, which influences the price we pay for a vehicle, and the date we scrapped a vehicle, which influences the price we receive for scrapping a vehicle.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our North America segment:
| | North America | | Percentage of Total Segment Revenue | | | Percentage of Total Segment Revenue | |
Segment EBITDA for the three months ended September 30, 2017 | | 12.9 | % | | |
Decrease due to: | | | | |
Segment EBITDA for the nine months ended September 30, 2018 | | | 12.9 | % | |
Increase (decrease) due to: | | | | |
Change in gross margin | | (0.4 | )% | (1) | | 1.0 | % | (1) |
Change in segment operating expenses | | (0.5 | )% | (2) | | (0.5 | )% | (2) |
Change in other expense, net and net income attributable to noncontrolling interest | | 0.2 | % | (3) | |
Segment EBITDA for the three months ended September 30, 2018 | | 12.2 | % | | |
Change in other expense, net and net income attributable to continuing noncontrolling interest | | | 0.2 | % | (3) |
Segment EBITDA for the nine months ended September 30, 2019 | | | 13.6 | % | |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The decreaseincrease in gross margin primarily reflected a favorable impact of 1.3% from our wholesale operations, partially offset by an unfavorable impact of 0.6%0.2% from our self service operations, partially offset by a favorable impact of 0.4% from ouroperations. The increase in wholesale operations.gross margin was primarily attributable to ongoing margin initiatives. The decrease in self service gross margin iswas primarily attributable to decliningsequential decreases in scrap steel prices (as described in the introduction above). The increase in wholesale gross margin is primarily due to pricing changes as discussed in the revenue section above. The remaining change in gross margin was attributable to a number of individually insignificant factors that had an unfavorable impact of 0.2% in the aggregate.higher cost vehicles were scrapped. |
| |
(2) | The increase in segment operating expenses as a percentage of revenue is primarily reflectedrelated to a 0.5%0.4% increase in distributionfacility expenses principally due to higher expenses in rent related vehicle expensesto expansions and higher use of third party freight.renewals. The increase in distribution related vehiclesegment operating expenses was primarily due to increasesalso reflects the negative leverage effect resulting from the year over year decline in fuel prices, other vehicle relatedrevenue of $21 million, as incremental scrap revenue does not require additional overhead costs, and increased vehicle rental leases to handle incremental volumes.such as commissions |
and delivery costs, thus creating a dilutive impact to margin in periods with declining scrap revenue.
| |
(3) | The decrease in other expense, net was primarily due toand net income attributable to continuing noncontrolling interest and other miscellaneous non-operating expenses.was due to several individually immaterial factors that had a favorable impact of 0.2% in the aggregate. |
Europe
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our Europe segment (in thousands):
| | | Three Months Ended September 30, | | Percentage Change in Revenue | Nine Months Ended September 30, | | Percentage Change in Revenue |
Europe | 2018 | | 2017 | | Organic (1) | | Acquisition (2) | | Foreign Exchange (3) | | Total Change | 2019 | | 2018 | | Organic (1) | | Acquisition (2) | | Foreign Exchange (3) | | Total Change |
Parts & services revenue | $ | 1,464,049 |
| | $ | 952,765 |
| | 2.0 | % | | 52.6 | % | | (0.9 | )% | | 53.7 | % | $ | 4,398,185 |
| | $ | 3,781,091 |
| | (0.3 | )% | | 22.2 | % | | (5.6 | )% | | 16.3 | % |
Other revenue | 6,807 |
| | 1,757 |
| | 88.3 | % | | 204.9 | % | | (5.8 | )% | | 287.4 | % | 15,079 |
| | 14,348 |
| | (5.7 | )% | | 17.6 | % | | (6.8 | )% | | 5.1 | % |
Total third party revenue | $ | 1,470,856 |
| | $ | 954,522 |
| | 2.2 | % | | 52.9 | % | | (1.0 | )% | | 54.1 | % | $ | 4,413,264 |
| | $ | 3,795,439 |
| | (0.3 | )% | | 22.1 | % | | (5.6 | )% | | 16.3 | % |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | Parts and services organic revenue growthdeclined for the quarter variedfirst nine months of 2019, primarily affected by geography. In our Eastern European operations, revenue grew in the mid-single digits due to both existing and new branches (we added 39 since the beginning of the third quarter of 2017). Favorable market conditions in the region, including the expanding car parc and population of older model year vehicles, have contributed to the growth. Our Western European operations experienced flat to low single digit growth in the quarter. While we expect to achieve lower organic growth rates in these more mature markets than in Eastern Europe, our revenue growth in the quarter was negatively impacted by competitor actions,softer economic conditions in certain countries and warmer than normal weather conditions.across the continent. Additionally, we believe the U.K.'s potential exit from the European Union had a negative impact on that market for the year to date period. |
| |
(2) | Acquisition related growth for the threenine months ended September 30, 2018 included $4692019 was $840 million, or 49.1%22.1%, primarily from our acquisition of Stahlgruber. The remainder of our acquired revenue growth included revenue from our acquisitions of 14 wholesale businesses in our Europe segment since the beginning of the third quarter of 2017 through the one-year anniversary of the acquisitions. |
| |
(3) | Compared to the prior year, exchange rates decreased our revenue growth by $9$212 million, or 1.0%5.6%, primarily due to the stronger U.S. dollar against the euro, and pound sterling and Czech koruna during the third quarterfirst nine months of 20182019 relative to the comparable period of 2017.2018. |
Segment EBITDA. Segment EBITDA increased $50$31 million, or 63.1%9.7%, in the third quarterfirst nine months of 20182019 compared to the third quartercomparable period of 2017.the prior year. Our Europe Segment EBITDA included an immateriala negative year over year impact of $18 million related to the translation of local currency results into U.S. dollars at higherlower exchange rates than those experienced during 2017.the first nine months of 2018. On a constant currency basis (i.e. excluding the translation impact), Segment EBITDA increased by $48 million, or 15.2%, compared to the prior year. Refer to the Foreign Currency Impact discussion within the Results of Operations–Consolidated section above for further detail regarding foreign currency impact on our results for the nine months ended September 30, 2019.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Europe segment:
| | Europe | | Percentage of Total Segment Revenue | | | Percentage of Total Segment Revenue | |
Segment EBITDA for the three months ended September 30, 2017 | | 8.3 | % | | |
Segment EBITDA for the nine months ended September 30, 2018 | | | 8.3 | % | |
Increase (decrease) due to: | | | | | | |
Change in gross margin | | 0.2 | % | (1) | | 0.2 | % | (1) |
Change in segment operating expenses | | 0.4 | % | (2) | | (0.6 | )% | (2) |
Change in other expense, net and net income attributable to noncontrolling interest | | (0.1 | )% | | |
Segment EBITDA for the three months ended September 30, 2018 | | 8.8 | % | | |
Segment EBITDA for the nine months ended September 30, 2019 | | | 7.8 | % | |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The increase in grossGross margin was due to (i) a 0.4% increase in our Benelux operationsincreased primarily due to the ongoing move from a three-step to a two-step distribution model as well as an increase in supplier rebates, (ii) a 0.3%0.5% favorable impact related to an increase in supplier rebates as a result of centralized procurement for our Europe segment, and (iii)partially offset by a 0.3% net increase due to mixunfavorable impact related to our acquisition of Stahlgruber. The favorable effects were partially offset by (i) a 0.4% decrease in our U.K.Central European operations, primarily as a result of incremental costs related to the national distribution facility as well as higher inventory write-offs, partially offset by increased supplier rebates, (ii) a 0.3% decreaseprincipally due to a mix shift to our Centrallower prices and Eastern European operations, and (iii) several individually immaterial factors that had an unfavorable impact of 0.1% in the aggregate. |
| |
(2) | The decrease in segment operating expenses as a percentage of revenue was due to (i) a 0.4% decrease in personnelproduct mix. |
(2) The increase in segment operating expenses was primarily due to (i) a reduction0.7% increase in incentive benefits in our U.K. operations,personnel expenses principally as a result of the negative leverage effect, and (ii) a 0.3% decrease related to our acquisition of Stahlgruber. These favorable effects were partially offset by (i) a 0.2% increase in professional fees primarily duetransformation expenses related to new information technology projects andthe 1 LKQ Europe program, partially offset by a 0.3% decrease in other system enhancements, and (ii) several individually immaterial factors that had an unfavorable impact of 0.1% in the aggregate.
expenses.
Specialty
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our Specialty segment (in thousands):
| | | Three Months Ended September 30, | | Percentage Change in Revenue | Nine Months Ended September 30, | | Percentage Change in Revenue |
Specialty | 2018 | | 2017 | | Organic (1) | | Acquisition (2) | | Foreign Exchange | | Total Change | 2019 | | 2018 | | Organic (1) | | Acquisition | | Foreign Exchange | | Total Change |
Parts & services revenue | $ | 388,865 |
| | $ | 329,522 |
| | 8.0 | % | | 10.5 | % | | (0.5 | )% | | 18.0 | % | $ | 1,157,023 |
| | $ | 1,151,172 |
| | 0.8 | % | | — | % | | (0.3 | )% | | 0.5 | % |
Other revenue | — |
| | — |
| | — | % | | — | % | | — | % | | — | % | — |
| | — |
| | — | % | | — | % | | — | % | | — | % |
Total third party revenue | $ | 388,865 |
| | $ | 329,522 |
| | 8.0 | % | | 10.5 | % | | (0.5 | )% | | 18.0 | % | $ | 1,157,023 |
| | $ | 1,151,172 |
| | 0.8 | % | | — | % | | (0.3 | )% | | 0.5 | % |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | Organic growth in parts and services revenue was primarily due to higher volumes across both our automotive and RV businesses in the U.S., largely due to expansion of our product line coverage, strong exclusive line performance, and year over year growthcontinued roll-out of new vehicleproduct applications for new model year vehicles. The organic growth was partially offset by decreased sales of pickups, sport utility vehicles and other highly accessorized vehicles. |
| |
(2) | Acquisition related growthvolumes in the third quarter of 2018 included $34 million, or 10.3%, from our acquisition of Warn. The remainder of our acquired revenue growth reflected an immaterial amount of acquired revenue from our acquisitions of two wholesale businesses from the beginning of the third quarter of 2017 upCanada operations compared to the one-year anniversary of the acquisition dates.prior year period, primarily due to softening economic conditions. |
Segment EBITDA. Segment EBITDA increased $8decreased $5 million, or 22.3%3.7%, in the third quarterfirst nine months of 20182019 compared to the prior year third quarter.period.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Specialty segment:
|
| | | | |
Specialty | | Percentage of Total Segment Revenue | |
Segment EBITDA for the three months ended September 30, 2017 | | 10.6 | % | |
Increase (decrease) due to: | | | |
Change in gross margin | | 0.6 | % | (1) |
Change in segment operating expenses | | (0.3 | )% | (2) |
Change in other expense, net | | 0.1 | % | |
Segment EBITDA for the three months ended September 30, 2018 | | 11.0 | % | |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The increase in gross margin reflects favorable impacts of (i) 0.9% from our acquisition of Warn, which has a higher gross margin than our other Specialty operations, and (ii) several individually immaterial factors that had a favorable impact of 0.2% in the aggregate, partially offset by (iii) 0.5% of increased inventory write-downs as damaged and defective product was identified during our warehouse expansion projects on the West Coast and Southeastern U.S. |
| |
(2) | The increase in segment operating expenses primarily reflects (i) an unfavorable impact of 0.2% in vehicle and fuel expenses principally due to increased fuel prices, and (ii) several individually immaterial factors that had an unfavorable impact of 0.1% in the aggregate. |
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
North America
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our North America segment (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Percentage Change in Revenue |
North America | 2018 | | 2017 | | Organic | | Acquisition (3) | | Foreign Exchange | | Total Change |
Parts & services revenue | $ | 3,447,074 |
| | $ | 3,207,001 |
| | 6.4 | % | (1 | ) | 1.0 | % | | 0.1 | % | | 7.5 | % |
Other revenue | 480,208 |
| | 389,107 |
| | 23.0 | % | (2 | ) | 0.4 | % | | — | % | | 23.4 | % |
Total third party revenue | $ | 3,927,282 |
| | $ | 3,596,108 |
| | 8.2 | % | | 0.9 | % | | 0.1 | % | | 9.2 | % |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | Organic growth in parts and services revenue was largely attributable to increased sales volumes and, to a lesser extent, favorable pricing in our wholesale operations. The volume increases were primarily driven by (i) severe winter weather conditions in the first quarter of 2018 compared to mild winter weather conditions in the prior year period, and (ii) to a lesser extent, incremental sales related to an agreement signed in December 2017 for the distribution of batteries. |
| |
(2) | The $91 million increase in other revenue primarily related to (i) a $57 million increase in revenue from scrap steel and other metals primarily related to higher prices and, to a lesser extent, increased volumes, year over year, (ii) a $19 million increase in revenue from metals found in catalytic converters (platinum, palladium, and rhodium) primarily due to higher prices and, to a lesser extent, increased volumes, year over year, and (iii) a $6 million increase in core revenue primarily related to increased volumes year over year. |
| |
(3) | Acquisition related growth in the first nine months of 2018 reflected revenue from our acquisition of seven wholesale businesses from the beginning of 2017 up to the one-year anniversary of the acquisition dates. |
Segment EBITDA. Segment EBITDA increased $4 million, or 0.9%, in the first nine months of 2018 compared to the prior year period. Sequential increases in scrap steel prices in our salvage and self service operations had a favorable impact of $10 million on North America Segment EBITDA during the first nine months of 2018, compared to a $12 million positive impact on the first nine months of 2017. This favorable impact resulted from the increase in scrap steel prices between the date we purchased a vehicle, which influences the price we pay for a vehicle, and the date we scrapped a vehicle, which influences the price we receive for scrapping a vehicle.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our North America segment:
| | North America | | Percentage of Total Segment Revenue | | |
Segment EBITDA for the nine months ended September 30, 2017 | | 14.0 | % | | |
Decrease due to: | | | | |
Specialty | | | Percentage of Total Segment Revenue | |
Segment EBITDA for the nine months ended September 30, 2018 | | | 12.2 | % | |
(Decrease) increase due to: | | | | |
Change in gross margin | | (0.7 | )% | (1) | | (1.2 | )% | (1) |
Change in segment operating expenses | | (0.4 | )% | (2) | | 0.7 | % | (2) |
Segment EBITDA for the nine months ended September 30, 2018 | | 12.9 | % | | |
Segment EBITDA for the nine months ended September 30, 2019 | | | 11.7 | % | |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The decrease in gross margin reflectedreflects unfavorable impacts of (i) 0.5% of higher product costs, primarily due to non-recurring benefits from supplier discounts resulting from strategic purchasing efforts in the fourth quarter of 2017, which had a favorable impact on the first nine months of 2018 as they were recognized over a turn of inventory, (ii) 0.4% due to unfavorable product mix in the first nine months of 2019, and 0.3% from our wholesale and self service operations, respectively. The decrease in wholesale gross margin is primarily attributable to (i) a shift in our sales toward lower margin products, including batteries, compared to the prior year period, and (ii) higher car costs in our salvage operations. The decrease in self service gross margin is primarily attributable(iii) 0.2% due to higher car costscapitalized overhead expenses as a result of increases in scrap priceswarehouse expansion projects that were completed in the firstsecond half of the year. While higher car costs can produce more gross margin dollars, these cars tend to have a dilutive effect on the gross margin percentage as parts revenue will typically increase at a lesser rate than the rise in average car cost. Self service gross margin was negatively impacted in the third quarter due to declining scrap steel prices as the higher cost vehicles were scrapped.2018. |
| |
(2) | The increasedecrease in segment operating expenses as a percentage of revenue reflected (i) a 0.3% and 0.2% increase in freight and vehicle expenses, respectively, primarily due to higher use of third party freight and increased vehicle |
rental leases to handle incremental volumes as well as increases in fuel prices.
Europe
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our Europe segment (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Percentage Change in Revenue |
Europe | 2018 | | 2017 | | Organic (1) | | Acquisition (2) | | Foreign Exchange (3) | | Total Change |
Parts & services revenue | $ | 3,781,091 |
| | $ | 2,659,804 |
| | 3.8 | % | | 31.9 | % | | 6.4 | % | | 42.2 | % |
Other revenue | 14,348 |
| | 5,366 |
| | 84.4 | % | | 80.1 | % | | 2.9 | % | | 167.4 | % |
Total third party revenue | $ | 3,795,439 |
| | $ | 2,665,170 |
| | 4.0 | % | | 32.0 | % | | 6.4 | % | | 42.4 | % |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | Parts and services revenue growth for the quarter varied by geography. In our Eastern European operations, revenue grew in the high single digits due to both existing and new branches (we added 63 since the beginning of 2017), reflecting favorable market conditions in the region. Our Western European operations experienced flat to mid-single digit growth in the year to date period due primarily to higher volumes in the second quarter (partly attributable to the timing of the Easter holiday) offsetting softness in the first and third quarters. See the quarterly discussion for further detail on the third quarter variance. |
| |
(2) | Acquisition related growth for the nine months ended September 30, 2018 included $637 million, or 23.9%, $79 million, or 3.0%, and $72 million, or 2.7%, from our acquisitions of Stahlgruber and aftermarket parts distribution businesses in Poland and Belgium, respectively. The remainder of our acquired revenue growth included revenue from our acquisitions of 18 wholesale businesses in our Europe segment since the beginning of 2017 through the one-year anniversary of the acquisitions. |
| |
(3) | Compared to the prior year, exchange rates increased our revenue growth by $170 million, or 6.4%, primarily due to the weaker U.S. dollar against the pound sterling, euro and Czech koruna during the first nine months of 2018 relative to the comparable period of 2017. |
Segment EBITDA. Segment EBITDA increased $74 million, or 30.7% in the first nine months of 2018 compared to the first nine months of 2017. Our Europe Segment EBITDA included a positive year over year impact of $17 million related to the translation of local currency results into U.S. dollars at higher exchange rates than those experienced during 2017. On a constant currency basis (i.e. excluding the translation impact), Segment EBITDA increased by $57 million, or 23.7%, compared to the prior year. Refer to the Foreign Currency Impact discussion within the Results of Operations - Consolidated section above for further detail regarding foreign currency impact on our results for the nine months ended September 30, 2018.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Europe segment:
|
| | | | |
Europe | | Percentage of Total Segment Revenue | |
Segment EBITDA for the nine months ended September 30, 2017 | | 9.1 | % | |
Decrease due to: | | | |
Change in gross margin | | (0.6 | )% | (1) |
Change in segment operating expenses | | (0.1 | )% | (2) |
Change in other expense, net and net income attributable to noncontrolling interest | | (0.1 | )% | |
Segment EBITDA for the nine months ended September 30, 2018 | | 8.3 | % | |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The decline in gross margin was due to (i) a 0.9% decrease related to our U.K. operations primarily as a result of incremental costs related to the national distribution facility, primarily as a result of replenishment issues and related stock availability in the first quarter at our national distribution center and branches that led to some temporary service |
issues and increased labor costs to manually stock and receive product, and higher customer incentives, and(ii) a 0.4% net decrease due to mix related to our acquisition of an aftermarket parts distribution business in Poland during the third quarter of 2017. The unfavorable effects were partially offset by (i) a 0.4% increase in gross margin in our Benelux operations primarily due to the ongoing move from a three-step to a two-step distribution model, increased private label sales, which have higher gross margins, and increased supplier rebates, and (ii) a 0.3% favorable impact related to an increase in supplier rebates as a result of centralized procurement for our Europe segment.
| |
(2) | The increase in segment operating expenses as a percentage of revenue was due to a 0.2% increase in professional fees primarily due to new information technology projects and other system enhancements, partially offset by several individually immaterial factors that had a favorable impact of 0.1% in the aggregate. |
Specialty
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our Specialty segment (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Percentage Change in Revenue |
Specialty | 2018 | | 2017 | | Organic (1) | | Acquisition (2) | | Foreign Exchange | | Total Change |
Parts & services revenue | $ | 1,151,172 |
| | $ | 1,005,776 |
| | 4.2 | % | | 10.1 | % | | 0.1 | % | | 14.5 | % |
Other revenue | — |
| | — |
| | — | % | | — | % | | — | % | | — | % |
Total third party revenue | $ | 1,151,172 |
| | $ | 1,005,776 |
| | 4.2 | % | | 10.1 | % | | 0.1 | % | | 14.5 | % |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The organic revenue growth rate was higher in the second and third quarters than the first quarter due to the factors discussed in the Specialty revenue section of the three months results discussion above. |
| |
(2) | Acquisition related growth in the nine months ended September 30, 2018 included $100 million, or 9.9%, from our acquisition of Warn. The remainder of our acquired revenue growth reflected an immaterial amount of acquired revenue from our acquisitions of three wholesale businesses from the beginning of the third quarter of 2017 up to the one-year anniversary of the acquisition dates. |
Segment EBITDA. Segment EBITDA increased $22 million, or 18.3%, in the first nine months of 2018 compared to the prior year period.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Specialty segment:
|
| | | | |
Specialty | | Percentage of Total Segment Revenue | |
Segment EBITDA for the nine months ended September 30, 2017 | | 11.8 | % | |
Increase (decrease) due to: | | | |
Change in gross margin | | 1.2 | % | (1) |
Change in segment operating expenses | | (0.8 | )% | (2) |
Segment EBITDA for the nine months ended September 30, 2018 | | 12.2 | % | |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The increase in gross margin reflects favorable impacts of (i) 0.9% from our acquisition of Warn, which has a higher gross margin than our existing Specialty operations, and (ii) 0.4% from our initiatives to improve gross margin, including a decreased focus on selling to lower margin customers. The favorable effects were partially offset by (i) 0.2% of increased inventory write-downs as damaged and defective product was identified during our warehouse expansion projects on the West Coast and Southeastern U.S. |
| |
(2) | The increase in segment operating expenses reflects unfavorable impacts of (i) 0.4%0.5% in personnel costs primarily as a result of a negative leverage effect, as personnel costs in our salesdue to reduced headcount and marketing and distribution functions grew at a greater rate than organic revenue, (ii) 0.2% from our acquisitionin freight, vehicle and fuel expenses due to a decreased use of Warn, which has higher operating expenses as athird party freight. |
percentage of revenue than our existing Specialty operations, and (iii) 0.2% in vehicle and fuel expenses primarily due to increased fuel prices.63
Liquidity and Capital Resources
The following table summarizes liquidity data as of the dates indicated (in thousands):
| | | September 30, 2018 | | December 31, 2017 | | September 30, 2017 | September 30, 2019 | | December 31, 2018 | | September 30, 2018 |
Cash and cash equivalents | $ | 341,346 |
| | $ | 279,766 |
| | $ | 275,077 |
| $ | 433,391 |
| | $ | 331,761 |
| | $ | 341,346 |
|
Total debt (1) | 4,404,369 |
| | 3,428,280 |
| | 3,170,100 |
| 3,896,722 |
| | 4,347,697 |
| | 4,404,369 |
|
Current maturities (2) | 122,981 |
| | 129,184 |
| | 129,320 |
| 128,426 |
| | 122,117 |
| | 122,981 |
|
Capacity under credit facilities (3) | 2,850,000 |
| | 2,850,000 |
| | 2,550,000 |
| 3,260,000 |
| | 3,260,000 |
| | 2,850,000 |
|
Availability under credit facilities (3) | 1,501,226 |
| | 1,395,081 |
| | 1,338,264 |
| 2,044,940 |
| | 1,697,698 |
| | 1,501,226 |
|
Total liquidity (cash and cash equivalents plus availability under credit facilities) | 1,842,572 |
| | 1,674,847 |
| | 1,613,341 |
| 2,478,331 |
| | 2,029,459 |
| | 1,842,572 |
|
| |
(1) | Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of $36$31 million, $24$37 million and $21$36 million as of September 30, 2018,2019, December 31, 20172018 and September 30, 2017,2018, respectively). |
| |
(2) | Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of $5 million, $3 millionimmaterial amounts as of both September 30, 2019 and $2December 31, 2018 and $5 million as of September 30, 2018, December 31, 2017 and September 30, 2017, respectively)2018). |
| |
(3) | Capacity under credit facilities includes our revolving credit facilities and our receivables securitization facility. Availability under credit facilities is reduced by our outstanding letters of credit. |
We assess our liquidity in terms of our ability to fund our operations and provide for expansion through both internal development and acquisitions. Our primary sources of liquidity are cash flows from operations and our credit facilities. We utilize our cash flows from operations to fund working capital and capital expenditures, with the excess amounts going towards funding acquisitions or paying down outstanding debt. As we have pursued acquisitions as part of our growth strategy, our cash flows from operations have not always been sufficient to cover our investing activities. To fund our acquisitions, we have accessed various forms of debt financing, including revolving credit facilities, senior notes and our receivables securitization facility.
As of September 30, 2018,2019, we had debt outstanding and additional available sources of financing as follows:
Senior secured credit facilities maturing in January 2023,2024, composed of term loans totaling $750$350 million ($590343 million outstanding at September 30, 2018)2019) and $2.75$3.15 billion in revolving credit ($1.21.1 billion outstanding at September 30, 2018)2019), bearing interest at variable rates (although a portion of thisthe outstanding debt is hedged through interest rate swap contracts), with availability reduced by $65$69 million of amounts outstanding under letters of credit
U.S. Notes (2023) totaling $600 million, maturing in May 2023 and bearing interest at a 4.75% fixed rate
Euro Notes (2024) totaling $580$545 million (€500 million), maturing in April 2024 and bearing interest at a 3.875% fixed rate
Euro Notes (2026/28) totaling $1.2$1.1 billion (€1.0 billion), consisting of (i) €750 million maturing in April 2026 and bearing interest at a 3.625% fixed rate, and (ii) €250 million maturing in April 2028 and bearing interest at a 4.125% fixed rate
Receivables securitization facility with availability up to $100$110 million ($100 million(no outstanding balance as of September 30, 2018)2019), maturing in November 20192021 and bearing interest at variable commercial paper rates
From time to time, we may undertake financing transactions to increase our available liquidity, such as (i) our November 2018 amendment to our senior secured credit facility and (ii) the issuance of the Euro Notes (2026/28) in April 2018 related to the Stahlgruber acquisition and our December 2017 amendment to our senior secured credit facilities.acquisition. Given the long-term nature of our investment in Stahlgruber, combined with favorable interest rates, we decided to fund the acquisition primarily through long-term, fixed rate notes. We believe this approach provides financial flexibility to execute our long-term growth strategy while maintaining availability under our revolver. If we see an attractive acquisition opportunity, we have the ability to use our revolver to move quickly and have certainty of funding up to the amount of our then-available liquidity.
The enterprise value for the Stahlgruber acquisition was €1.5 billion, which was financed with the proceeds from the €1.0 billion of Euro Notes (2026/28), 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.
As of September 30, 2018,2019, we had approximately $1.5$2.0 billion available under our credit facilities. Combined with approximately $341$433 million of cash and cash equivalents at September 30, 2018,2019, we had approximately $1.8$2.5 billion in available liquidity, an increase of $168$449 million over our available liquidity as of December 31, 2017.2018.
We believe that our current liquidity and cash expected to be generated by operating activities in future periods will be sufficient to meet our current operating and capital requirements, although such sources may not be sufficient for future acquisitions depending on their size. While we believe that we have adequate capacity, from time to time we may need to raise additional funds through public or private financing, strategic relationships or other arrangements, as noted above regarding the Stahlgruber transaction.arrangements. There can be no assurance that additional funding, or refinancing of our credit facilities, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants or higher interest costs. Our failure to raise capital if and when needed could have a material adverse impact on our business, operating results, and financial condition.
Borrowings under the credit agreement accrue interest at variable rates which are tied to LIBOR or the Canadian Dollar Offered Rate ("CDOR"), depending on the currency and the duration of the borrowing, plus an applicable margin rate which is subject to change quarterly based on our reported leverage ratio. We hold interest rate swaps to hedge the variable rates on a portion of our credit agreement borrowings, with the effect of fixing the interest rates on the respective notional amounts. In addition, in 2016, we entered intohold cross currency swaps that contain an interest rate swap component and a foreign currency forward contract component that, when combined with related intercompany financing arrangements, effectively convert variable rate U.S. dollar-denominated borrowings into fixed rate euro-denominated borrowings. These derivative transactions are described in Note 11, "Derivative Instruments and Hedging Activities" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. After giving effect to these contracts, the weighted average interest rate on borrowings outstanding under our credit agreement at September 30, 20182019 was 2.2%1.6%. Including our senior notes and the borrowings under our receivables securitization program, our overall weighted average interest rate on borrowings was 3.2%3.1% at September 30, 2018.2019.
After 2021, it is unclear whether banks will continue to provide LIBOR submissions to the administrator of LIBOR, and no consensus currently exists as to what benchmark rate or rates may become accepted alternatives to LIBOR. We cannot currently predict the effect of the discontinuation of, or other changes to, LIBOR or any establishment of alternative reference rates in the United States, the European Union or elsewhere on the global capital markets. The uncertainty regarding the future of LIBOR, as well as the transition from LIBOR to any alternative reference rate or rates, could have adverse impacts on our variable rate obligations that currently use LIBOR as a benchmark rate. We are in the process of evaluating our financing obligations and other contracts that refer to LIBOR. Outstanding debt under our Credit Agreement, which constitutes the most significant of our LIBOR-based debt obligations, contains provisions that address the potential discontinuation of LIBOR and facilitate the adoption of an alternate rate of interest. We do not believe that the discontinuation of LIBOR, or its replacement with an alternative reference rate or rates, will have a material impact on our results of operations, financial position or liquidity.
Cash interest payments were $74$87 million for the nine months ended September 30, 2018,2019, including $26$46 million in semi-annual interest payments on our U.S. Notes (2023) and our, Euro Notes (2024) and Euro Notes (2026/28). Interest payments on our U.S. Notes (2023) are made in May and November, and interest payments on our Euro Notes (2024) are scheduled for April and October. Beginning in the fourth quarter of 2018, we will also make semi-annual interest payments of $22 million on our Euro Notes (2026/28). Interest payments on our Euro Notes (2026/28) are made in April and October.
We had outstanding credit agreement borrowings of $1.8$1.5 billion and $2.0$1.7 billion at September 30, 20182019 and December 31, 2017,2018, respectively. Of these amounts, there$15 million and $9 million were no borrowings classified as current maturities at September 30, 2018 compared to $18 million at2019 and December 31, 2017.2018, respectively.
The scheduled maturities of long-term obligations, inclusive of finance lease obligations, outstanding at September 30, 20182019 are as follows (in thousands):
| | Three months ending December 31, 2018 | $ | 93,675 |
| |
Three months ending December 31, 2019 (1): | | $ | 103,696 |
|
Years ending December 31: | | |
2019 | 141,522 |
| |
2020 | 27,679 |
| 34,105 |
|
2021 | 16,184 |
| 30,443 |
|
2022 | 40,881 |
| 26,190 |
|
2023 | 2,332,702 |
| 621,651 |
|
Thereafter | 1,751,726 |
| 3,080,637 |
|
Total debt (1) | $ | 4,404,369 |
| |
Total debt (2) | | $ | 3,896,722 |
|
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(1) | The totalMaturities of long-term obligations due by December 31, 2019 includes $84 million of short-term debt amounts presented above reflectthat may be extended beyond the gross values to be repaid (excluding debt issuance costs of $36 million as of September 30, 2018).current due date. |
(2) The total debt amounts presented above reflect the gross values to be repaid (excluding debt issuance costs of $31 million as of September 30, 2019).
Our credit agreement contains 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. We were in compliance with all restrictive covenants under our credit agreement as of September 30, 2018.2019.
The following summarizes our required debt covenants and our actual ratios with respect to those covenants as calculated per the credit agreement as of September 30, 2019:
|
| | | |
| Covenant Level | | Ratio Achieved as of September 30, 2019 |
Maximum net leverage ratio | 4.25:1.00 | | 2.6 |
Minimum interest coverage ratio | 3.00:1.00 | | 9.9 |
The terms net leverage ratio and minimum interest coverage ratio used in the credit agreement are specifically calculated per the credit agreement and differ in specified ways from comparable GAAP or common usage terms.
As of September 30, 2018,2019, the Company had cash and cash equivalents of $341$433 million, of which $260$256 million was held by foreign subsidiaries. In general, it has beenis our practice and intention to permanently reinvest the undistributed earnings of our foreign subsidiaries, and that position has not changed following the enactment of the Tax Act and the related imposition of the transition tax, except as described below.tax. Distributions of dividends from our foreign subsidiaries, willif any, would be generally exempt from further U.S. taxation, either as a result of the new 100% participation exemption under the Tax Act, or due to the previous taxation of foreign earnings under the transition tax. In July 2018, to lower our average borrowing cost, we elected to unwind several financing entities in Europe, restructure and increase related Europe borrowings and repatriate cash to reduce U.S. borrowings. However, we are still evaluating whether the Tax Act will affect the Company’s prior general existing policy to indefinitely reinvest unremitted foreign earnings.
We believe that we have sufficient cash flow and liquidity to meet our financial obligations in the U.S. without resorting to repatriation ofrepatriating our foreign earnings. As noted, weWe may, from time to time, choose to selectively repatriate foreign earnings if doing so supports our financing or liquidity objectives. As a result of the Tax Act, we have had significantly lower income tax payments in 2018 due to the lower tax rate and the immediate deduction of capital expenditures, partially offset by the first payment with respect to the transition tax.
The procurement of inventory is the largest operating use of our funds. We normally pay for aftermarket product purchases on standard payment terms or at the time of shipment, or on standard payment terms, depending on the manufacturer and the negotiated payment terms. We normally pay for salvage vehicles acquired at salvage auctions and under direct procurement arrangements at the time that we take possession of the vehicles.
The following table sets forth a summary of our aftermarket and manufactured inventory procurement for the three and nine months ended September 30, 20182019 and 20172018 (in thousands):
| | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Nine Months Ended | |
| September 30, | | September 30, | | | September 30, | | September 30, | |
| 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change | | | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | |
North America | $ | 333,100 |
| | $ | 338,600 |
| | $ | (5,500 | ) | | $ | 1,054,900 |
| | $ | 997,700 |
| | $ | 57,200 |
| (1) | | $ | 325,600 |
| | $ | 333,100 |
| | $ | (7,500 | ) |
| $ | 1,005,000 |
| | $ | 1,054,900 |
| | $ | (49,900 | ) | (1) |
Europe | 1,096,800 |
| | 637,700 |
| | 459,100 |
| | 2,591,000 |
| | 1,701,200 |
| | 889,800 |
| (2) | | 1,009,700 |
| | 1,096,800 |
| | (87,100 | ) |
| 2,931,300 |
| | 2,591,000 |
| | 340,300 |
| (2) |
Specialty | 271,400 |
| | 244,800 |
| | 26,600 |
| | 842,000 |
| | 739,800 |
| | 102,200 |
| (3) | | 288,100 |
| | 271,400 |
| | 16,700 |
|
| 825,800 |
| | 842,000 |
| | (16,200 | ) | (3) |
Total | $ | 1,701,300 |
| | $ | 1,221,100 |
| | $ | 480,200 |
| | $ | 4,487,900 |
| | $ | 3,438,700 |
| | $ | 1,049,200 |
| | | $ | 1,623,400 |
| | $ | 1,701,300 |
| | $ | (77,900 | ) | | $ | 4,762,100 |
| | $ | 4,487,900 |
| | $ | 274,200 |
| |
| |
(1) | In North America, aftermarket purchases during the nine months ended September 30, 2018 increased2019 decreased compared to the comparable prior year period to support growth across our operations.primarily as a result of an increased focus on inventory reduction. |
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(2) | In our Europe segment, the increase in purchases during the nine months ended September 30, 20182019 was primarily driven by (i) a $491$588 million increase attributable to inventory purchases at Stahlgruber from the date of acquisition through September 30, 2018, (ii) a $167 million increase primarily attributable to our Eastern Europe operations, of which $73 million was due to incremental inventory purchases in the first seven months of 2018 as a result of our acquisition of an aftermarket parts distribution business in PolandStahlgruber in the thirdsecond quarter of 2017; the remaining increase was2018, partially offset by (ii) a $32 million decrease attributable to our continental European operations and a $61 million decrease attributable to our U.K. operations primarily due to branch expansion in Eastern Europe, and (iii)inventory reduction efforts. There was also a $138decrease of $146 million increase in purchases at our Benelux operations, of which $41 million was attributable to incremental inventory purchases in the first six months of 2018 as a result of our acquisitions of aftermarket parts distribution businesses in Belgium in the third quarter of 2017. The increase in inventory purchases was also driven byattributable to the increasedecrease in the value of the euro and pound sterling in the first nine months of 2018ended September 30, 2019 compared to the first nine months of 2017.prior year period. |
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(3) | In our Specialty segment, the acquisition of Warn in November 2017 added incrementalinventory purchases of $55decreased $16 million during the nine months ended September 30, 2018, which includes purchases of aftermarket inventory and raw materials used in the manufacturing of specialty products. Specialty inventory purchases also increased during the nine months ended September 30, 20182019 compared to the prior year period to support growth in our operations.primarily as a result of an increased focus on inventory reduction. |
The following table sets forth a summary of our global wholesale salvage and self service procurement for the three and nine months ended September 30, 20182019 and 20172018 (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | |
| September 30, | | September 30, | |
| 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change | |
North America wholesale salvage cars and trucks | 73 |
| | 74 |
| | (1.4 | )% | | 229 |
| | 226 |
| | 1.3 | % | |
Europe wholesale salvage cars and trucks | 6 |
| | 6 |
| | — | % | | 21 |
| | 18 |
| | 16.7 | % | |
Self service and "crush only" cars | 136 |
| | 138 |
| | (1.4 | )% | | 427 |
| | 412 |
| | 3.6 | % | (1) |
(1) Compared to the prior year period, we have increased the number of self service and "crush only" vehicles purchased in the first nine months of 2018 to support growth in our operations. |
| | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | |
| September 30, | | September 30, | |
| 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change | |
North America wholesale salvage cars and trucks | 78 |
| | 73 |
| | 6.8 | % | | 230 |
| | 229 |
| | 0.4 | % | |
Europe wholesale salvage cars and trucks | 5 |
| | 6 |
| | (16.7 | )% | | 19 |
| | 21 |
| | (9.5 | )% | |
Self service and "crush only" cars | 151 |
| | 136 |
| | 11.0 | % | | 455 |
| | 427 |
| | 6.6 | % | |
The following table summarizes the components of the year-over-year increase in cash provided by operating activities (in millions):
| | Net cash provided by operating activities for the nine months ended September 30, 2017 | $ | 449 |
| | |
Increase (decrease) due to: (1) | | | |
Discontinued operations | 4 |
| (2) | |
Net cash provided by operating activities for the nine months ended September 30, 2018 | | $ | 521 |
| |
(Decrease) increase due to: | | | |
Operating income | 39 |
| (3) | (28 | ) | (1) |
Non-cash depreciation and amortization expense | 44 |
| (4) | 19 |
| (2) |
Non-cash impairment on Mekonomen investment | 23 |
| (5) | |
Impairment of net assets held for sale | | 45 |
| (3) |
Cash paid for taxes | 60 |
| | 24 |
| |
Cash paid for interest | (17 | ) | | (12 | ) | |
Working capital accounts: (6) | | | |
Working capital accounts: (4) | | | |
Accounts receivable | (12 | ) | | (31 | ) | |
Inventory | 22 |
| | 219 |
| |
Accounts payable | (94 | ) | (7) | 163 |
| |
Pension funding | (9 | ) | (8) | |
Other operating activities | 12 |
| (9) | 45 |
| (5) |
Net cash provided by operating activities for the nine months ended September 30, 2018 | $ | 521 |
| | |
Net cash provided by operating activities for the nine months ended September 30, 2019 | | $ | 965 |
| |
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(1) | Other than discontinued operations, the amounts presented represent increases (decreases) in operating cash flows attributable to our continuing operations only. |
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(2) | In the first quarter of 2017, our glass manufacturing business generated operating cash outflows of $4 million. We disposed of this business on March 1, 2017, and therefore, the discontinued operations had no impact on our current year operating cash flows. |
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(3) | Refer to the Results of Operations - Consolidated section for further information on the increasedecrease in operating income. |
| |
(4)(2) | Non-cash depreciation and amortization expense increased compared to the prior year period as discussed in the Results of Operations - Consolidated section. |
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(5)(3) | In the third quarterfirst nine months of 2018,2019, we recorded an other-than-temporary impairment charges on our investmentnet assets held for sale. See "Net Assets Held for Sale" in Mekonomen. See Note 4, "Financial Statement Information" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the net impairment charge.charges. |
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(6)(4) | Cash flows related to our primary working capital accounts can be volatile as the purchases, payments and collections can be timed differently from period to period and can be influenced by factors outside of our control. However, we expect that the net change in these working capital items will generally be a cash outflow as we expect to grow our business each year.period. |
Inventory represented an incremental $219 million in cash inflows in 2019 as a result of deliberate inventory reduction efforts in all three segments to reflect organic revenue conditions, as disclosed in the procurement section above.
Accounts payable produced an incremental $163 million in cash flows primarily due to timing effects related to our May 30, 2018 acquisition of Stahlgruber. Additionally, we increased accounts payable through extension of vendor terms in North America.
Accounts receivable was a $31 million greater outflow in 2019, primarily attributable to timing effects from the Stahlgruber acquisition, and also to a lesser extent, the unwind of a receivables factoring program at Stahlgruber.
| |
(7) | Includes an outflow of $52 million related to Stahlgruber resulting from the timing of the acquisition. Due to the timing of processing invoice payments after the closing date, we assumed a larger payable balance but acquired more cash at closing. However, the cash acquired at closing is reflected in the Investing section of the cash flow statement on the Acquisitions, net of cash acquired line. |
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(8) | During the nine months ended September 30, 2018, we made a special contribution of $9 million to one of our North America pension plans. See Note 13, "Employee Benefit Plans" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our pension plans. |
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(9)(5) | Reflects a number of individually insignificant fluctuations in cash paid for other operating activities. |
Net cash used in investing activities totaled $1.4 billion$160 million for the nine months ended September 30, 2018,2019, compared to $84 million$1.4 billion of cash used in investing activities during the nine months ended September 30, 2017.2018. We invested $1.2 billion$15 million of cash, net of cash acquired, in business acquisitions during the nine months ended September 30, 20182019 compared to $253 million$1.2 billion during the nine months ended September 30, 2017. We received net proceeds from2018, primarily related to the sale of our glass manufacturing business totaling $301 million during the nine months ended September 30, 2017; no such proceeds were received in 2018.Stahlgruber acquisition. Property, plant and
equipment purchases were $172$166 million in the first nine months of 20182019 compared to $136$172 million in the prior year.year period. The period over period increasedecrease in cash outflows for purchases of property, plant and equipment was primarily relateddue to decreases in our Specialty and North America and Europe segments. We received $20 million of net proceeds from divestitures of assets held for sale during the nine months ended September 30, 2019; no such proceeds were received in 2018.
Net cash provided byused in financing activities totaled $1.0 billion$690 million for the nine months ended September 30, 2018,2019, compared to net cash used in$1.0 billion provided by financing activities during the nine months ended September 30, 2018. We received $1.2 billion from our issuance of $347the Euro Notes (2026/2028) during the nine months ended September 30, 2019; no such proceeds were received in the current year. We repurchased $292 million of our common stock in the first nine months of 2019; we did not repurchase any shares in the comparable period of 2018. During the nine months ended September 30, 2019, net repayments of our borrowings totaled $391 million compared to $238 million during the nine months ended September 30, 2017. We received proceeds of $1.23 billion from our issuance of the Euro Notes (2026/28) during the nine months ended September 30, 2018; no such proceeds were received in the prior year. We also paid $17 million of debt issuance costs during the first nine months of 2018, primarily related to the issuance of the Euro Notes (2026/28); no such costs were incurred in the prior year. During the nine months ended September 30, 2018, net repayments under our credit facilities totaled $199 million compared to $375 million during the nine months ended September 30, 2017. There were $39 million of cash repayments of other debt in the first nine months of 2018, compared to $25 million of cash proceeds from other debt in the first nine months of 2017.
During the first nine months of 2018, foreign exchange rates decreased cash and cash equivalents by $67 million, compared to an increase of $23 million in the first nine months of the prior year. The current year impact was primarily related to a $66 million decrease resulting from the decline in the euro exchange rate between April 9, 2018, the date we received the proceeds from the Euro Notes (2026/28), and May 30, 2018, the date we paid the cash proceeds for the Stahlgruber acquisition.2018.
We intend to continue to evaluate markets for potential growth through the internal development of distribution centers, processing and sales facilities, and warehouses, through further integration of our facilities, and through selected business acquisitions. Our future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of our internal development efforts and the success of those efforts, the costs and timing of expansion of our sales and marketing activities, and the costs and timing of future business acquisitions.
Off-Balance Sheet Arrangements and Future Commitments
We do not have any off-balance sheet arrangements or undisclosed borrowings or debt that would be required to be disclosed pursuant to Item 303 of Regulation S-K under the Securities Exchange Act of 1934. Additionally, we do not have any synthetic leases.
In the Management's Discussion and Analysis section of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018 filed with the SEC on August 6, 2018, we disclosed our contractual obligations as of June 30, 2018 due to the material changes to those obligations resulting from the completed offering of €1.0 billion of Euro Notes (2026/28) in April 2018 and the acquisition of Stahlgruber in May 2018. There have been no material changes to the information contained in those disclosures as of September 30, 2018.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks arising from adverse changes in:
foreign exchange rates;
interest rates; and
commodity prices.
Foreign Exchange Rates
Foreign currency fluctuations may impact the financial results we report for the portions of our business that operate in functional currencies other than the U.S. dollar. Our operations outside of the U.S. represented 46.8%50.1% and 41.8%47.9% of our revenue during the nine months ended September 30, 20182019 and the year ended December 31, 2017,2018, respectively. An increase or decrease in the strength of the U.S. dollar against these currencies by 10% would result in a 4.7%5.0% change in our consolidated revenue and a 2.9%3.0% change in our operating income for the nine months ended September 30, 2018.2019. See our Results of Operations discussion in Part I, Item 2 of this Quarterly Report on Form 10-Q for additional information regarding the impact of fluctuations in exchange rates on our year over year results.
Additionally, we are exposed to foreign currency fluctuations with respect to the purchase of aftermarket products from foreign countries, primarily in Europe and Asia. To the extent that our inventory purchases are not denominated in the functional currency of the purchasing location, we are exposed to exchange rate fluctuations. In several of our operations, we purchase inventory from manufacturers in Taiwan in U.S. dollars, which exposes us to fluctuations in the relationship between the local functional currency and the U.S. dollar, as well as fluctuations between the U.S. dollar and the Taiwan dollar. We hedge our exposure to foreign currency fluctuations related to a portion of inventory purchases in our Europe operations, but the notional amount and fair value of these foreign currency forward contracts at September 30, 20182019 were immaterial. We do not currently attempt to hedge foreign currency exposure related to our foreign currency denominated inventory purchases in our North America operations, and we may not be able to pass on any resulting price increases to our customers.
Other than with respect to a portion of our foreign currency denominated inventory purchases, we do not hold derivative contracts to hedge foreign currency risk. Our net investment in foreign operations is partially hedged by the foreign currency denominated borrowings we use to fund foreign acquisitions; however, our ability to use foreign currency denominated borrowings to finance our foreign operations may be limited based on local tax laws. We have elected not to hedge the foreign currency risk related to the interest payments on foreign borrowings as we generate cash flows in the local currencies that can be used to fund debt payments. As of September 30, 2019, we had outstanding borrowings of €500 million under our Euro Notes (2024), €1.0 billion under our Euro Notes (2026/28), and £171 million, €101 million, CAD $130 million, and SEK 270 million under our revolving credit facilities. As of December 31, 2018, we had outstanding borrowings of €500 million under our Euro Notes (2024), €1.0 billion under our Euro Notes (2026/28), and £293£290 million, €238€163 million, CAD $130 million, and SEK 265275 million under our revolving credit facilities. As of December 31, 2017, we had outstanding borrowings of €500 million under our Euro Notes (2024), and £124 million, CAD $130 million, SEK 250 million, and €132 million under our revolving credit facilities. The interest payments on our €1.0 billion Euro Notes (2026/28) will be funded primarily by cash flows generated by Stahlgruber.
Interest Rates
Our results of operations are exposed to changes in interest rates primarily with respect to borrowings under our credit facilities, where interest rates are tied to the prime rate, LIBOR or CDOR. Therefore, we implemented a policy to manage our exposure to variable interest rates on a portion of our outstanding variable rate debt instruments through the use of interest rate swap contracts. These contracts convert a portion of our variable rate debt to fixed rate debt, matching the currency, effective dates and maturity dates to specific debt instruments. Net interest payments or receipts from interest rate swap contracts are included as adjustments to interest expense. All of our interest rate swap contracts have been executed with banks that we believe are creditworthy (Wells Fargo Bank, N.A.; Bank of America, N.A.; Citizens, N.A.; Fifth Third Bank; HSBC Bank USA, N.A.; and Banco Bilbao Vizcaya Argentaria, S.A.).
As of September 30, 2018,2019, we held teneight interest rate swap contracts representing a total of $590$480 million of U.S. dollar-denominated notional amount debt. Our interest rate swap contracts are designated as cash flow hedges and modify the variable rate nature of that portion of our variable rate debt. These swaps have maturity dates ranging from January 2021 through June 2021. As of September 30, 2018,2019, the fair value of the interest rate swap contracts was an asset of $26$4 million. The values of such contracts are subject to changes in interest rates.
In addition to these interest rate swaps, as of September 30, 20182019 we held threefive cross currency swap agreements for a total notional amount of $395$562 million (€374519 million) with maturity dates in October 2019, October 2020, and 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 reduce uncertainty in cash flows in U.S. dollars and euros in connection with intercompany financing arrangements. The cross currency swaps were also executed with banks we believe are creditworthy (Wells Fargo Bank, N.A.; Bank of America, N.A.; MUFG; and The Bank of Tokyo-Mitsubishi UFJ, Ltd.)SunTrust Bank). As of September 30, 2018,2019, the fair value of the interest rate swap components of the cross currency swaps was an asset of $11an immaterial amount and a liability of $1 million, and the fair value of the foreign currency forward components was an asset of $10 million and a liability of $49$13 million. The values of these contracts are subject to changes in interest rates and foreign currency exchange rates.
In total, we had 53%70% of our variable rate debt under our credit facilities at fixed rates at September 30, 20182019 compared to 48%57% at December 31, 2017.2018. See Note 10, "Long-Term Obligations" and Note 11, "Derivative Instruments and Hedging Activities" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
At September 30, 2018,2019, we had approximately $889$447 million of variable rate debt that was not hedged. Using sensitivity analysis, a 100 basis point movement in interest rates would change interest expense by $9$4 million over the next twelve months.
Commodity Prices
We are exposed to market risk related to price fluctuations in scrap metal and other metals. Market prices of these metals affect the amount that we pay for our inventory and the revenue that we generate from sales of these metals. As both our revenue and costs are affected by the price fluctuations, we have a natural hedge against the changes. However, there is typically a lag between the effect on our revenue from metal price fluctuations and inventory cost changes, and there is no guarantee that the vehicle costs will decrease or increase at the same rate as the metals prices. Therefore, we can experience positive or negative gross margin effects in periods of rising or falling metals prices, particularly when such prices move rapidly. Additionally, if market prices were to change at a greater rate than our vehicle acquisition costs, we could experience a positive or negative effect on our operating margin. The average of scrap metal prices for the three months ended September 30, 20182019 has decreased 16%14% over the average for the second quarter of 2018.2019.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2018,2019, the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of LKQ Corporation's management, including our Chief Executive Officer and our Chief Financial Officer, of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective in providing reasonable assurance that information we are required to disclose in this Quarterly Report on Form 10-Q has been recorded, processed, summarized and reported as of the end of the period covered by this Quarterly Report on Form 10-Q. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file under the Securities Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
We are from time to time subject to various claims and lawsuits incidental to our business. In the opinion of management, currently outstanding claims and suits will not, individually or in the aggregate, have a material adverse effect on our financial position, results of operations or cash flows.
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition and results of operations, and the trading price of our common stock. Please refer to our 2017 Annual Report on Form 10-K, filed with the SEC on February 28, 2018 and our Quarterly Reports on Form 10-Q filed subsequent to the Annual Report on Form 10-K for information concerning risks and uncertainties that could negatively impact us. The following represents changes and/or additions to the risks and uncertainties previously disclosed in the 2018 Form 10-K.
Intellectual property claims relating to aftermarket products could adversely affect our business.
OEMs and others have attempted to use claims of intellectual property infringement against manufacturers and distributors of aftermarket products to restrict or eliminate the sale of aftermarket products that are the subject of the claims. OEMs have brought such claims in federal court and with the U.S. International Trade Commission. In some cases, we have entered into patent license agreements with OEMs that allow us to sell aftermarket parts that replicate the patented parts in exchange for a royalty and otherwise in accordance with the terms of the agreements.
To the extent OEMs and other manufacturers obtain design patents or trademarks and are successful in asserting claims of infringement of these patents or trademarks against us, we could be restricted or prohibited from selling certain aftermarket products, which could have an adverse effect on our business. In the event that our license agreements, or other similar license arrangements with OEMs or others, are terminated or we are unable to agree upon renewal terms, we may be subject to costs and uncertainties of litigation as well as restrictions on our ability to sell aftermarket parts that replicate parts covered by those design patents or trademarks.We have filed, and may file in the future, challenges to OEM patents. To the extent OEMs are successful in defending their patents, we could be restricted or prohibited from selling the corresponding aftermarket products, which could have an adverse effect on our business. Also, we will likely incur expenses investigating, pursuing and defending intellectual property claims.
U.S. Customs and Border Protection has taken the position that certain of our aftermarket parts infringe certain OEM trademarks and seized our aftermarket parts as we attempted to import them into the U.S. We incur costs and expenses attempting to convince Customs and Border Protection to release the seized goods and in litigation where we are seeking a determination of non-infringement. In the event we are unsuccessful in obtaining their release, such goods may be subject to forfeiture and other penalties.
Aftermarket products certifying organizations may revoke the certification of parts that are the subject of the intellectual property disputes. Lack of certification may negatively impact us because many major insurance companies recommend or require the use of aftermarket products only if they have been certified by an independent certifying organization.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On October 25, 2018, our Board of Directors authorized a stock repurchase program under which we may purchase up to $500 million of our common stock from time to time through October 25, 2021. Repurchases under the program may be made in the open market or in privately negotiated transactions, with the amount and timing of repurchases depending on market conditions and corporate needs. The repurchase program does not obligate us to acquire any specific number of shares and may be suspended or discontinued at any time. Delaware law imposes restrictions on stock repurchases.
The following table summarizes our stock repurchases for the three months ended September 30, 2019 (in thousands, except per share data):
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| | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
July 1, 2019 - July 31, 2019 | | 2,175 |
| | $ | 26.44 |
| | 2,175 |
| | $ | 191,736 |
|
August 1, 2019 - August 31, 2019 | | 1,706 |
| | $ | 25.53 |
| | 1,706 |
| | $ | 148,187 |
|
September 1, 2019 - September 30, 2019 | | — |
| | $ | — |
| | — |
| | $ | 148,187 |
|
Total | | 3,881 |
| | | | 3,881 |
| | |
| | | | | | | | |
On October 25, 2019, our Board of Directors authorized an increase to our existing stock repurchase program under which the Company may purchase up to an additional $500 million of our common stock from time to time through October 25, 2022; this extended date also applies to the original repurchase program. With the increase, the Board of Directors has authorized a total of $1.0 billion of common stock repurchases. As of the date of this filing, there was $648 million of remaining capacity under our repurchase program, with the additional $500 million authorization.
Item 6. Exhibits
Exhibits
(b) Exhibits
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| Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 6, 2018.5, 2019.
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| LKQ CORPORATION |
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| /s/ Varun Laroyia |
| Varun Laroyia |
| Executive Vice President and Chief Financial Officer |
| (As duly authorized officer and Principal Financial Officer) |
| |
| /s/ Michael S. Clark |
| Michael S. Clark |
| Vice President - Finance and Controller |
| (As duly authorized officer and Principal Accounting Officer) |