LKQ-2015.06.30 10-Q

10-Q 1 lkq-2015063010xq.htm 10-Q LKQ-2015.06.30 10-Q

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 June 30, 2015



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number: 000-50404

________________________

LKQ CORPORATION

(Exact name of registrant as specified in its charter)

________________________



DELAWARE		36-4215970
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

500 WEST MADISON STREET, SUITE 2800, CHICAGO, IL		60661
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (312) 621-1950

________________________

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, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

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 July 24, 2015, the registrant had issued and outstanding an aggregate of 304,922,348 shares of Common Stock.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Balance Sheets (In thousands, except share and per share data)

	June 30,			December 31,
	2015			2014
Assets
Current Assets:
Cash and equivalents	$	143,423		$	114,605
Receivables, net	651,271			601,422
Inventory	1,402,399			1,433,847
Deferred income taxes	77,968			81,744
Prepaid expenses and other current assets	97,560			85,799
Total Current Assets	2,372,621			2,317,417
Property and Equipment, net	650,053			629,987
Intangible Assets:
Goodwill	2,286,518			2,288,895
Other intangibles, net	228,580			245,525
Other Assets	96,770			91,668
Total Assets	$	5,634,542		$	5,573,492
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	392,951		$	400,202
Accrued expenses:
Accrued payroll-related liabilities	69,327			86,016
Other accrued expenses	183,423			164,148
Other current liabilities	41,286			36,815
Current portion of long-term obligations	39,378			63,515
Total Current Liabilities	726,365			750,696
Long-Term Obligations, Excluding Current Portion	1,652,064			1,801,047
Deferred Income Taxes	178,523			181,662
Other Noncurrent Liabilities	123,497			119,430
Commitments and Contingencies
Stockholders’ Equity:
Common stock, $0.01 par value,1,000,000,000 shares authorized, 304,435,529 and 303,452,655 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively	3,044			3,035
Additional paid-in capital	1,070,288			1,054,686
Retained earnings	1,929,978			1,703,161
Accumulated other comprehensive loss	(49,217		)	(40,225		)
Total Stockholders’ Equity	2,954,093			2,720,657
Total Liabilities and Stockholders’ Equity	$	5,634,542		$	5,573,492

See notes to unaudited condensed consolidated financial statements

LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Income (In thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Revenue	$	1,838,070		$	1,709,132		$	3,611,982		$	3,334,909
Cost of goods sold	1,114,126			1,038,073			2,188,559			2,011,966
Gross margin	723,944			671,059			1,423,423			1,322,943
Facility and warehouse expenses	136,379			128,506			269,036			254,665
Distribution expenses	150,039			146,544			291,753			283,873
Selling, general and administrative expenses	205,796			186,585			409,037			371,115
Restructuring and acquisition related expenses	1,663			5,901			8,151			9,222
Depreciation and amortization	29,782			29,927			59,235			56,638
Operating income	200,285			173,596			386,211			347,430
Other expense (income):
Interest expense, net	14,622			15,628			29,528			31,746
Loss on debt extinguishment	—			—			—			324
Change in fair value of contingent consideration liabilities	125			(790		)	276			(2,012		)
Other (income) expense, net	(28		)	(907		)	1,740			(1,003		)
Total other expense, net	14,719			13,931			31,544			29,055
Income before provision for income taxes	185,566			159,665			354,667			318,375
Provision for income taxes	64,682			54,341			124,780			108,362
Equity in earnings of unconsolidated subsidiaries	(1,162		)	(442		)	(3,070		)	(478		)
Net income	$	119,722		$	104,882		$	226,817		$	209,535
Earnings per share:
Basic	$	0.39		$	0.35		$	0.75		$	0.69
Diluted	$	0.39		$	0.34		$	0.74		$	0.69

Unaudited Condensed Consolidated Statements of Comprehensive Income (In thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Net income	$	119,722		$	104,882		$	226,817		$	209,535
Other comprehensive income (loss), net of tax:
Foreign currency translation	44,510			15,879			(10,300		)	15,316
Net change in unrecognized gains/losses on derivative instruments, net of tax	918			457			1,201			1,250
Net change in unrealized gains/losses on pension plan, net of tax	(21		)	(30		)	107			(67		)
Total other comprehensive income (loss)	45,407			16,306			(8,992		)	16,499
Total comprehensive income	$	165,129		$	121,188		$	217,825		$	226,034

See notes to unaudited condensed consolidated financial statements

LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Cash Flows (In thousands)

	Six Months Ended
	June 30,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	226,817		$	209,535
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	61,714			58,893
Stock-based compensation expense	11,114			11,783
Excess tax benefit from stock-based payments	(6,737		)	(9,747		)
Other	5,880			1,645
Changes in operating assets and liabilities, net of effects from acquisitions:
Receivables	(48,995		)	(71,779		)
Inventory	38,399			(40,773		)
Prepaid income taxes/income taxes payable	21,052			9,653
Accounts payable	(18,597		)	(20,549		)
Other operating assets and liabilities	(7,948		)	3,543
Net cash provided by operating activities	282,699			152,204
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(66,763		)	(67,331		)
Acquisitions, net of cash acquired	(37,208		)	(635,332		)
Other investing activities, net	(5,209		)	341
Net cash used in investing activities	(109,180		)	(702,322		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	3,288			4,207
Excess tax benefit from stock-based payments	6,737			9,747
Taxes paid related to net share settlements of stock-based compensation awards	(5,243		)	—
Debt issuance costs	—			(3,715		)
Borrowings under revolving credit facilities	199,621			1,160,461
Repayments under revolving credit facilities	(294,276		)	(674,432		)
Borrowings under term loans	—			11,250
Repayments under term loans	(11,250		)	(5,625		)
Borrowings under receivables securitization facility	2,100			80,000
Repayments under receivables securitization facility	(1,758		)	—
Repayments of other long-term debt	(42,090		)	(13,529		)
Payments of other obligations	(2,050		)	(41,934		)
Settlement of foreign currency forward contract	—			(19,959		)
Net cash (used in) provided by financing activities	(144,921		)	506,471
Effect of exchange rate changes on cash and equivalents	220			2,723
Net increase (decrease) in cash and equivalents	28,818			(40,924		)
Cash and equivalents, beginning of period	114,605			150,488
Cash and equivalents, end of period	$	143,423		$	109,564
Supplemental disclosure of cash paid for:
Income taxes, net of refunds	$	102,747		$	98,938
Interest	28,656			29,182
Supplemental disclosure of noncash investing and financing activities:
Notes payable and other obligations, including notes issued and debt assumed in connection with business acquisitions	$	4,366		$	87,983
Contingent consideration liabilities	—			7,057
Noncash property and equipment additions	4,387			4,177

See notes to unaudited condensed consolidated financial statements

LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Stockholders’ Equity (In thousands)

	Common Stock					Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares Issued		Amount			Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
BALANCE, January 1, 2015	303,453		$	3,035		$	1,054,686		$	1,703,161	$	(40,225	)	$	2,720,657
Net income	—		—			—			226,817		—			226,817
Other comprehensive loss	—		—			—			—		(8,992		)	(8,992		)
Restricted stock units vested, net of shares withheld for employee tax	422		4			(2,007		)	—		—			(2,003		)
Stock-based compensation expense	—		—			11,114			—		—			11,114
Exercise of stock options	705		7			3,976			—		—			3,983
Shares withheld for net share settlements of stock option awards	(144	)	(2		)	(3,934		)	—		—			(3,936		)
Excess tax benefit from stock-based payments	—		—			6,453			—		—			6,453
BALANCE, June 30, 2015	304,436		$	3,044		$	1,070,288		$	1,929,978	$	(49,217	)	$	2,954,093

See notes to unaudited condensed consolidated financial statements

LKQ CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements


Note 1.	Interim Financial Statements

The unaudited financial statements presented in this report represent the consolidation of LKQ Corporation, a Delaware corporation, and its subsidiaries. LKQ Corporation is a holding company and all operations are conducted by subsidiaries. When the terms "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 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 most recent Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 2, 2015.


Note 2.	Financial Statement Information

Revenue Recognition

The majority of our revenue is derived from the sale of vehicle parts. Revenue is recognized when the products are shipped to, delivered to or picked up by customers and title has transferred, subject to an allowance for estimated returns, discounts and allowances that we estimate based upon historical information. We recorded a reserve for estimated returns, discounts and allowances of approximately $33.0 million and $31.3 million at June 30, 2015 and December 31, 2014, respectively. We present taxes assessed by governmental authorities collected from customers on a net basis. Therefore, the taxes are excluded from revenue on our Unaudited Condensed Consolidated Statements of Income and are shown as a current liability on our Unaudited Condensed Consolidated Balance Sheets until remitted. We recognize revenue from the sale of scrap metal, other metals, and cores when title has transferred, which typically occurs upon delivery to the customer.

Allowance for Doubtful Accounts

We recorded a reserve for uncollectible accounts of approximately $21.1 million and $19.4 million at June 30, 2015 and December 31, 2014, respectively.

Inventory

Inventory consists of the following (in thousands):



	June 30,		December 31,
	2015		2014
Aftermarket and refurbished products	$	1,013,084	$	1,022,549
Salvage and remanufactured products	389,315		411,298
	$	1,402,399	$	1,433,847

Intangible Assets

Intangible assets consist primarily of goodwill (the cost of purchased businesses in excess of the fair value of the identifiable net assets acquired) and other specifically identifiable intangible assets, such as trade names, trademarks, customer relationships, software and other technology related assets, and covenants not to compete.

The changes in the carrying amount of goodwill by reportable segment during the three months ended June 30, 2015 are as follows (in thousands):



	North America			Europe			Specialty			Total
Balance as of January 1, 2015	$	1,392,032		$	616,819		$	280,044		$	2,288,895
Business acquisitions and adjustments to previously recorded goodwill	4,613			15,048			(1,016		)	18,645
Exchange rate effects	(7,903		)	(13,104		)	(15		)	(21,022		)
Balance as of June 30, 2015	$	1,388,742		$	618,763		$	279,013		$	2,286,518

The components of other intangibles are as follows (in thousands):



	June 30, 2015							December 31, 2014
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Trade names and trademarks	$	172,121	$	(39,571	)	$	132,550	$	173,340	$	(35,538	)	$	137,802
Customer relationships	93,533		(33,977		)	59,556		92,972		(26,751		)	66,221
Software and other technology related assets	44,290		(14,009		)	30,281		44,640		(10,387		)	34,253
Covenants not to compete	10,766		(4,573		)	6,193		11,074		(3,825		)	7,249
	$	320,710	$	(92,130	)	$	228,580	$	322,026	$	(76,501	)	$	245,525

Trade names and trademarks are amortized over a useful life ranging from 10 to 30 years on a straight-line basis. Customer relationships are amortized over the expected period to be benefited (5 to 20 years) on an accelerated basis. Software and other technology related assets are amortized on a straight-line basis over the expected period to be benefited (five to six years). Covenants not to compete are amortized over the lives of the respective agreements, which range from one to five years, on a straight-line basis. Amortization expense for intangibles was $16.5 million and $15.8 million during the six months ended June 30, 2015 and 2014, respectively. Estimated amortization expense for each of the 5 years in the period ending December 31, 2019 is $32.8 million, $29.8 million, $27.3 million, $22.4 million and $17.8 million, respectively.

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 that is supported by certain of the suppliers of those products. We record the estimated warranty costs at the time of sale using historical warranty claim information to project future warranty claims activity. The changes in the warranty reserve are as follows (in thousands):



Balance as of January 1, 2015	$	14,881
Warranty expense	16,686
Warranty claims	(15,135		)
Balance as of June 30, 2015	$	16,432

Investments in Unconsolidated Subsidiaries

As of June 30, 2015, the carrying value of our investments in unconsolidated subsidiaries was $12.5 million; of this amount, $11.6 million relates to our investment in ACM Parts Pty Ltd ("ACM Parts"). In August 2013, we entered into an agreement with Suncorp Group, a leading general insurance group in Australia and New Zealand, to develop ACM Parts, an alternative vehicle replacement parts business in those countries. We hold a 49% interest in the entity and are contributing our experience to help establish automotive parts recycling operations and to facilitate the procurement of aftermarket parts; Suncorp Group holds a 51% equity interest and is supplying salvage vehicles to the venture as well as assisting in establishing relationships with repair shops as customers. We are accounting for our interest in this subsidiary using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over the investee. During the six months ended June 30, 2015, we increased our total investment in ACM Parts by $7.5 million, which is reflected in Other investing activities, net on the Unaudited Condensed Consolidated Statements of Cash Flows. Our total ownership interest in ACM Parts remains unchanged as a result of this additional investment. The total of our investment in ACM Parts and other

unconsolidated subsidiaries is included within Other Assets on our Unaudited Condensed Consolidated Balance Sheets. Our equity in the net earnings of the investees for the three and six months ended June 30, 2015 was not material.

Depreciation Expense

Included in Cost of Goods Sold on the Unaudited Condensed Consolidated Statements of Income is depreciation expense associated with our refurbishing, remanufacturing, and furnace operations as well as our distribution centers.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which was amended in July 2015. This update outlines a new comprehensive revenue recognition model that supersedes most current revenue recognition guidance, and requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities adopting the standard have the option of using either a full retrospective or modified retrospective approach in the application of this guidance. ASU 2014-09 will be effective for the Company during the first quarter of our fiscal year 2018. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. We are still evaluating the impact that ASU 2014-09 will have on our consolidated financial statements and related disclosures.

In April 2015, the FASB issued Accounting Standards Update 2015-03, "Interest-Imputation of Interest " ("ASU 2015-03"). This update simplifies the presentation of debt issuance costs on the financial statements by requiring companies to reduce debt issuance costs from the carrying value of their corresponding liability on the balance sheet, rather than presenting debt issuance costs as deferred charges. ASU 2015-03 will be effective for the Company during the first quarter of our fiscal year 2016. Early adoption is permitted. Entities must retrospectively apply this guidance within the balance sheet for all periods presented in order to reflect the period-specific effects of this new guidance. We do not anticipate the adoption of this guidance will have a material impact on our financial position, results of operations, or cash flows.


Note 3.	Stock-Based Compensation

In order to attract and retain employees, non-employee directors, consultants, and other persons associated with us, we may grant qualified and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares and performance units under the LKQ Corporation 1998 Equity Incentive Plan (the “Equity Incentive Plan”). We have granted RSUs, stock options, and restricted stock under the Equity Incentive Plan. We expect to issue new shares of common stock to cover past and future equity grants.

RSUs

RSUs vest over periods of up to five years, subject to a continued service condition. Currently outstanding RSUs contain either a time-based vesting condition or a combination of a performance-based vesting condition and a time-based vesting condition, in which case, both conditions must be met before any RSUs vest. For the RSUs containing a performance-based vesting condition, the Company must report positive diluted earnings per share, subject to certain adjustments, during any fiscal year period within five years following the grant date. Each RSU converts into one share of LKQ common stock on the applicable vesting date. The grant date fair value of RSUs is based on the market price of LKQ stock on the grant date.

During the six months ended June 30, 2015, we granted 912,113 RSUs to employees. The fair value of RSUs that vested during the six months ended June 30, 2015 was $13.1 million.

The following table summarizes activity related to our RSUs under the Equity Incentive Plan for the six months ended June 30, 2015:



	Number Outstanding		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value (in thousands) ⁽¹⁾
Unvested as of January 1, 2015	2,151,232		$	20.97	$	60,493
Granted	912,113		$	27.03
Vested	(499,746	)	$	20.07
Forfeited / Canceled	(31,503	)	$	23.26
Unvested as of June 30, 2015	2,532,096		$	23.30	$	76,583
Expected to vest after June 30, 2015	2,444,395		$	23.16	$	73,931

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

Stock Options

Stock options vest over periods of up to five years, subject to a continued service condition. Stock options expire either six or ten years from the date they are granted. No options were granted during the six months ended June 30, 2015.

The following table summarizes activity related to our stock options under the Equity Incentive Plan for the six months ended June 30, 2015:



	Number Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands) ⁽¹⁾
Balance as of January 1, 2015	5,207,772		$	8.04	3.6	$	105,038
Exercised	(704,640	)	$	5.65
Forfeited / Canceled	(8,145	)	$	32.31
Balance as of June 30, 2015	4,494,987		$	8.37	3.3	$	98,551
Exercisable as of June 30, 2015	4,396,051		$	7.83	3.2	$	98,525
Exercisable as of June 30, 2015 and expected to vest thereafter	4,485,213		$	8.31	3.3	$	98,551

⁽¹⁾ The aggregate intrinsic value of outstanding, exercisable and expected to vest 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 January 1, 2015 and June 30, 2015, respectively. This amount changes based on the market price of the Company’s common stock.

The following table summarizes the components of pre-tax stock-based compensation expense (in thousands):



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
RSUs	$	5,528	$	4,795	$	10,948	$	10,191
Stock options	40		696		166		1,500
Restricted stock	—		46		—		92
Total stock-based compensation expense	$	5,568	$	5,537	$	11,114	$	11,783

As of June 30, 2015, unrecognized compensation expense related to unvested RSUs and stock options is $41.0 million and $0.4 million, respectively, and is expected to be recognized over weighted-average periods of 3.3 years and 1.5 years,

respectively. Stock-based compensation expense related to these awards will be different to the extent the actual forfeiture rates are different from our estimated forfeiture rates.


Note 4.	Long-Term Obligations

Long-Term Obligations consist of the following (in thousands):



	June 30,			December 31,
	2015			2014
Senior secured credit agreement:
Term loans payable	$	421,875		$	433,125
Revolving credit facilities	541,462			663,912
Senior notes	600,000			600,000
Receivables securitization facility	95,242			94,900
Notes payable through November 2019 at weighted average interest rates of 1.1% and 1.0%, respectively	15,478			45,891
Other long-term debt at weighted average interest rates of 3.6% and 3.1%, respectively	17,385			26,734
	1,691,442			1,864,562
Less current maturities	(39,378		)	(63,515		)
	$	1,652,064		$	1,801,047

Senior Secured Credit Agreement

On March 27, 2014, LKQ Corporation, LKQ Delaware LLP, and certain other subsidiaries (collectively, the "Borrowers") entered into a third amended and restated credit agreement (the "Credit Agreement"). Total availability under the Credit Agreement is $2.3 billion (composed of $1.69 billion in the revolving credit facility's multicurrency component, $165 million in the revolving credit facility's U.S. dollar only component, and $450 million of term loans). The Credit Agreement allows the Company to increase the amount of the revolving credit facility or obtain incremental term loans up to the greater of $400 million or the amount that may be borrowed while maintaining a senior secured leverage ratio of less than or equal to 2.50 to 1.00, subject to the agreement of the lenders.

Amounts under the revolving credit facilities are due and payable upon maturity of the Credit Agreement on May 3, 2019. Term loan borrowings are due and payable in quarterly installments equal to 1.25% of the original principal amount beginning on June 30, 2014 with the remaining balance due and payable on the maturity date of the Credit Agreement. 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 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.

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 5, "Derivative Instruments and Hedging Activities," the weighted average interest rates on borrowings outstanding under the Credit Agreement at June 30, 2015 and December 31, 2014 were 2.11% and 2.10%, 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 0.05% 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, as well as a fronting fee of 0.125% to the issuing bank, which are due quarterly in arrears.

Of the total borrowings outstanding under the Credit Agreement, $22.5 million was classified as current maturities at both June 30, 2015 and December 31, 2014. As of June 30, 2015, there were letters of credit outstanding in the aggregate amount of $71.5 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 June 30, 2015 was $1.2 billion.

Related to the execution of the Credit Agreement in March 2014, we incurred $3.7 million of fees, of which $3.4 million were capitalized within Other Assets on our Unaudited Condensed Consolidated Balance Sheet and are amortized over the term of the agreement. The remaining $0.3 million of fees were expensed during the three months ended March 31, 2014 as a loss on debt extinguishment.

Senior Notes

In April 2014, LKQ Corporation completed an offer to exchange $600 million aggregate principal amount of registered 4.75% Senior Notes due 2023 (the "Notes") for notes previously issued through a private placement. The Notes are governed by the original Indenture dated as of May 9, 2013 among LKQ Corporation, certain of our subsidiaries (the "Guarantors") and U.S. Bank National Association, as trustee. The Notes are substantially identical to those previously issued through the private placement, except the Notes are registered under the Securities Act of 1933.

The Notes 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 Notes is payable in arrears on May 15 and November 15 of each year. The first interest payment was made on November 15, 2013. The Notes are fully and unconditionally guaranteed, jointly and severally, by the Guarantors.

The Notes and the guarantees are, respectively, LKQ Corporation's and each Guarantor's senior unsecured obligations. The Notes are subordinated to all of LKQ Corporation's and the Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Notes are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Notes to the extent of the assets of those subsidiaries.

Receivables Securitization Facility

On September 29, 2014, LKQ Corporation amended the terms of the receivables securitization facility with The Bank of Tokyo-Mitsubishi UFJ, LTD. ("BTMU ") to: (i) extend the term of the facility to October 2, 2017; (ii) increase the maximum amount available to $97 million; and (iii) make other clarifying and updating changes. Under the facility, LKQ sells an ownership interest in certain receivables, related collections and security interests to BTMU for the benefit of conduit investors and/or financial institutions for cash proceeds. Upon payment of the receivables by customers, rather than remitting to BTMU the amounts collected, LKQ retains such collections as proceeds for the sale of new receivables generated by certain of the ongoing operations of the Company.

The sale of the ownership interest in the receivables is accounted for as a secured borrowing in our Unaudited Condensed Consolidated Balance Sheets, under which the receivables included in the program collateralize the amounts invested by BTMU, the conduit investors and/or financial institutions (the "Purchasers"). The receivables are held by LKQ Receivables Finance Company, LLC ("LRFC"), a wholly owned bankruptcy-remote special purpose subsidiary of LKQ, and therefore, the receivables are available first to satisfy the creditors of LRFC, including the investors. As of June 30, 2015 and December 31, 2014, $130.1 million and $129.5 million, respectively, of net receivables were collateral for the investment under the receivables facility.

Under the receivables facility, we pay variable interest rates plus a margin on the outstanding amounts invested by the Purchasers. The variable rates are based on (i) commercial paper rates, (ii) the London InterBank Offered Rate ("LIBOR"), or (iii) base rates, and are payable monthly in arrears. Commercial paper rates will be the applicable variable rate unless conduit investors are not available to invest in the receivables at commercial paper rates. In such case, financial institutions will invest at the LIBOR rate or at base rates. We also pay a commitment fee on the excess of the investment maximum over the average daily outstanding investment, payable monthly in arrears. As of June 30, 2015, the interest rate under the receivables facility was based on commercial paper rates and was 0.94%. The outstanding balances of $95.2 million and $94.9 million as of June 30, 2015 and December 31, 2014, respectively, were classified as long-term on the Unaudited Condensed Consolidated Balance Sheets because we have the ability and intent to refinance these borrowings on a long-term basis.


Note 5.	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, changing foreign exchange rates for certain foreign currency denominated transactions and changes in metals prices. We do not hold or issue derivatives for trading purposes.

Cash Flow Hedges

At June 30, 2015, we had interest rate swap agreements in place 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 or the Canadian Dealer Offered Rate (“CDOR”) for the respective currency of each interest rate swap agreement’s notional amount. The effective portion of changes in the fair value of the interest rate swap agreements is recorded in Accumulated Other Comprehensive Income (Loss) and is reclassified to interest expense when the underlying interest payment has an impact on earnings. The ineffective portion of changes in the fair value of the interest rate swap agreements is reported in interest expense. Our interest rate swap contracts have maturity dates ranging from 2015 through 2016.

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 changing exchange rates on these future cash flows, as well as minimizing the impact of fluctuating exchange rates on our results of operations through the respective dates of settlement. Under the terms of the foreign currency forward contracts, we will sell the foreign currency in exchange for U.S. dollars at a fixed rate on the maturity dates of the contracts. The effective portion of the changes in fair value of the foreign currency forward contracts is recorded in Accumulated Other Comprehensive Income (Loss) and reclassified to other income (expense) when the underlying transaction has an impact on earnings.

The following table summarizes the notional amounts and fair values of our designated cash flow hedges as of June 30, 2015 and December 31, 2014 (in thousands):



	Notional Amount				Fair Value at June 30, 2015 (USD)				Fair Value at December 31, 2014 (USD)
	June 30, 2015		December 31, 2014		Other Accrued Expenses		Other Noncurrent Liabilities		Other Accrued Expenses		Other Noncurrent Liabilities
Interest rate swap agreements
USD denominated	$	420,000	$	420,000	$	1,043	$	1,564	$	2,691	$	1,615
GBP denominated	£	50,000	£	50,000	—		687		—		893
CAD denominated	C$	25,000	C$	25,000	83		—		—		19
Total cash flow hedges					$	1,126	$	2,251	$	2,691	$	2,527

While our derivative instruments executed with the same counterparty are subject to master netting arrangements, we present our cash flow hedge derivative instruments on a gross basis in our Unaudited Condensed Consolidated Balance Sheets. The impact of netting the fair values of these contracts would not have a material effect on our Unaudited Condensed Consolidated Balance Sheets at June 30, 2015 or December 31, 2014.

The activity related to our cash flow hedges is included in Note 12, "Accumulated Other Comprehensive Income (Loss)." Ineffectiveness related to our cash flow hedges was immaterial to our results of operations during the three and six months ended June 30, 2015 and June 30, 2014. We do not expect future ineffectiveness related to our cash flow hedges to have a material effect on our results of operations.

As of June 30, 2015, we estimate that $2.0 million of derivative losses (net of tax) included in Accumulated Other Comprehensive Loss will be reclassified into our consolidated statements of income within the next 12 months.

Other Derivative Instruments

We hold other short-term derivative instruments, including foreign currency forward contracts, to manage our exposure to variability related to inventory purchases and intercompany financing transactions denominated in a non-functional currency, as well as commodity forward contracts to manage our exposure to fluctuations in precious metals prices. 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 June 30, 2015 and December 31, 2014, along with the effect on our results of operations during each of the six month periods ended June 30, 2015 and June 30, 2014, were immaterial.


Note 6.	Fair Value Measurements

Financial Assets and Liabilities Measured at Fair Value

We use the market and income approaches to value our financial assets and liabilities, and during the six months ended June 30, 2015, 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 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 June 30, 2015 and December 31, 2014 (in thousands):



	Balance as of June 30, 2015		Fair Value Measurements as of June 30, 2015
	Balance as of June 30, 2015		Level 1		Level 2		Level 3
Assets:
Cash surrender value of life insurance	$	30,963	$	—	$	30,963	$	—
Total Assets	$	30,963	$	—	$	30,963	$	—
Liabilities:
Contingent consideration liabilities	$	5,191	$	—	$	—	$	5,191
Deferred compensation liabilities	30,126		—		30,126		—
Interest rate swaps	3,377		—		3,377		—
Total Liabilities	$	38,694	$	—	$	33,503	$	5,191



	Balance as of December 31, 2014		Fair Value Measurements as of December 31, 2014
	Balance as of December 31, 2014		Level 1		Level 2		Level 3
Assets:
Cash surrender value of life insurance	$	28,242	$	—	$	28,242	$	—
Total Assets	$	28,242	$	—	$	28,242	$	—
Liabilities:
Contingent consideration liabilities	$	7,295	$	—	$	—	$	7,295
Deferred compensation liabilities	27,580		—		27,580		—
Interest rate swaps	5,218		—		5,218		—
Total Liabilities	$	40,093	$	—	$	32,798	$	7,295

The cash surrender value of life insurance and deferred compensation liabilities are included in Other Assets and Other Noncurrent Liabilities, respectively, on our Unaudited Condensed Consolidated Balance Sheets. The current portion of contingent consideration liabilities is included in Other Current Liabilities and the noncurrent portion 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 is presented in Note 5, "Derivative Instruments and Hedging Activities."

Our Level 2 assets and liabilities are valued using inputs from third parties and market observable data. We obtain valuation data for the cash surrender value of life insurance and deferred compensation liabilities from third party sources, which determine the net asset values for our accounts using quoted market prices, investment allocations and reportable trades. We value our 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.

Our contingent consideration liabilities are related to our business acquisitions as further described in Note 8, "Business Combinations." 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. These unobservable inputs include internally-developed assumptions of the probabilities of achieving specified targets, which are used to determine the resulting cash flows and the applicable discount rate. Our Level 3 fair value measurements are established and updated quarterly by our corporate accounting department using current information about these key assumptions, with the input and oversight of our operational and executive management teams. We evaluate the performance of the business during the period compared to our previous expectations, along with any changes to our future projections, and update the estimated cash flows accordingly. In addition, we consider changes to our cost of capital and changes to the probability of achieving the earnout payment targets when updating our discount rate on a quarterly basis.

The significant unobservable inputs used in the fair value measurements of our Level 3 contingent consideration liabilities were as follows:



	June 30,		December 31,
	2015		2014
Unobservable Input	(Weighted Average)
Probability of achieving payout targets	73.6	%	79.1	%
Discount rate	7.5	%	7.5	%

A decrease in the assessed probabilities of achieving the targets or an increase in the discount rate, in isolation, would result in a lower fair value measurement. Changes in the values of the liabilities are recorded in Change in Fair Value of Contingent Consideration Liabilities within Other Expense (Income) on our Unaudited Condensed Consolidated Statements of Income.

Changes in the fair value of our contingent consideration obligations are as follows (in thousands):



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Beginning Balance	$	5,561		$	57,091		$	7,295		$	55,653
Contingent consideration liabilities recorded for business acquisitions	—			2,740			—			7,057
Payments	(538		)	(50,299		)	(2,205		)	(52,305		)
Increase (decrease) in fair value included in earnings	125			(790		)	276			(2,012		)
Exchange rate effects	43			20			(175		)	369
Ending Balance	$	5,191		$	8,762		$	5,191		$	8,762

The purchase price for our 2011 acquisition of Euro Car Parts Holdings Limited ("ECP") included contingent payments depending on the achievement of certain annual performance targets. The performance target for 2013 was exceeded, and therefore, we settled the liability related to the 2013 performance period for the maximum amount of £30 million during the three months ended June 30, 2014 through a cash payment of $44.8 million (£26.9 million) and the issuance of notes for $5.1 million (£3.1 million).

Of the amounts included in earnings for the three and six months ended June 30, 2015, $0.1 million and $0.3 million of losses, respectively, were related to contingent consideration obligations outstanding as of June 30, 2015. Of the amounts included in earnings for the three and six months ended June 30, 2014, $0.3 million losses were related to contingent consideration obligations outstanding as of June 30, 2015.

The changes in the fair value of contingent consideration obligations included in earnings during the respective periods in 2015 and 2014 reflect the quarterly reassessment of each obligation's fair value, including an analysis of the significant inputs used in the valuation, as well as the accretion of the present value discount.

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 June 30, 2015 and December 31, 2014, the fair value of our credit agreement borrowings reasonably approximated the carrying value of $963 million and $1.1 billion, respectively. In addition, based on market conditions, the fair value of the outstanding borrowings under the receivables facility reasonably approximated the carrying value of $95 million at June 30, 2015 and December 31, 2014. As of June 30, 2015 and December 31, 2014, the fair value of our senior notes was approximately $573 million and $569 million, respectively, compared to a carrying value of $600 million.

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 June 30, 2015 to assume these obligations. The fair value of our senior notes 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.


Note 7.	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 June 30, 2015 are as follows (in thousands):



Six months ending December 31, 2015	$	74,040
Years ending December 31:
2016	134,413
2017	113,676
2018	92,979
2019	73,985
2020	60,918
Thereafter	218,777
Future Minimum Lease Payments	$	768,788

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 8.	Business Combinations

During the six months ended June 30, 2015, we completed ten acquisitions, including three wholesale businesses in North America and seven wholesale businesses in Europe. Our European acquisitions included seven aftermarket parts distribution businesses in the Netherlands, five of which were former customers of and distributors for our Netherlands subsidiary, Sator Beheer B.V. ("Sator"), and were acquired with the objective of expanding our distribution network in the Netherlands. Our other acquisitions completed during the six months ended June 30, 2015 enabled us to expand our geographic presence. Total acquisition date fair value of the consideration for these acquisitions was $40.2 million, composed of $37.2 million of cash (net of cash acquired), $2.1 million of notes payable, and $0.9 million of pre-existing balances between us and the acquired entities considered to be effectively settled as a result of the acquisitions. During the six months ended June 30, 2015, we recorded $18.6 million of goodwill related to these acquisitions and immaterial adjustments to preliminary purchase price allocations related to certain of our 2014 acquisitions. We expect $4.7 million of the $18.6 million of goodwill recorded to be deductible for income tax purposes. As the acquisitions completed during the six months ended June 30, 2015 are immaterial to our business, we have omitted the detailed disclosures for these acquisitions prescribed by the accounting guidance on business combinations.

In July 2015, we completed the acquisitions of Parts Channel, Inc., an aftermarket collision parts distributor, as well as two aftermarket distributors in the Netherlands and a self service retail operation in the U.S. The preliminary aggregate cash purchase price for these acquisitions was approximately $75 million, net of cash acquired. We are in the process of completing the purchase accounting for our July 2015 acquisitions, and as a result, we are unable to disclose the amounts recognized for each major class of assets acquired and liabilities assumed, or the pro forma effect of the acquisitions on our results of operations in the U.S.

On January 3, 2014, we completed our acquisition of Keystone Automotive Holdings, Inc. ("Keystone Specialty"), which is a leading distributor and marketer of specialty vehicle aftermarket equipment and accessories in North America. Total acquisition date fair value of the consideration for our Keystone Specialty acquisition was $471.9 million, composed of $427.1 million of cash (net of cash acquired), $31.5 million of notes payable and $13.4 million of other purchase price obligations (non-interest bearing). We recorded $237.7 million of goodwill related to our acquisition of Keystone Specialty, which we do not expect to be deductible for income tax purposes.

In addition to our acquisition of Keystone Specialty, we made 22 acquisitions during 2014, including nine wholesale businesses in North America, nine wholesale businesses in Europe, two self service retail operations, and two specialty vehicle aftermarket businesses. Our European acquisitions included seven aftermarket parts distribution businesses in the Netherlands, five of which were customers of and distributors for our Netherlands subsidiary, Sator. Our European acquisitions were completed with the objective of aligning our Netherlands and U.K. distribution models; our other acquisitions completed

during the year ended December 31, 2014 enabled us to expand existing markets, introduce new product lines, and enter new markets. Total acquisition date fair value of the consideration for these additional acquisitions was $359.1 million, composed of $334.3 million of cash (net of cash acquired), $13.5 million of notes payable, $0.3 million of other purchase price obligations (non-interest bearing), $5.9 million for the estimated value of contingent payments to former owners (with maximum potential payments totaling $8.3 million), and $5.1 million of pre-existing balances between us and the acquired entities considered to be effectively settled as a result of the acquisitions. During the year ended December 31, 2014, we recorded $178.0 million of goodwill related to these acquisitions and immaterial adjustments to preliminary purchase price allocations related to certain of our 2013 acquisitions. We expect $44.2 million of the $178.0 million of goodwill recorded to be deductible for income tax purposes.

Our acquisitions are accounted for under the purchase method of accounting and are included in our unaudited condensed consolidated financial statements from the dates of acquisition. The purchase prices were allocated to the net assets acquired based upon estimated fair market values at the dates of acquisition. The purchase price allocations for the acquisitions made during the six months ended June 30, 2015 and the last six months of 2014 are preliminary as we are in the process of determining the following: 1) valuation amounts for certain receivables, inventories and fixed assets acquired; 2) valuation amounts for certain intangible assets acquired; 3) the acquisition date fair value of certain liabilities assumed; and 4) the final estimation of the tax basis of the entities acquired. We have recorded preliminary estimates for certain of the items noted above and will record adjustments, if any, to the preliminary amounts upon finalization of the valuations.

The preliminary purchase price allocations for the acquisitions completed during the year ended December 31, 2014 are as follows (in thousands):



	Year Ended
	December 31, 2014
	Keystone Specialty			Other Acquisitions			Total
Receivables	$	48,473		$	75,330		$	123,803
Receivable reserves	(7,748		)	(7,383		)	(15,131		)
Inventory	150,696			123,815			274,511
Income taxes receivable	14,096			—			14,096
Prepaid expenses and other current assets	8,085			4,050			12,135
Property and equipment	38,080			27,026			65,106
Goodwill	237,729			177,974			415,703
Other intangibles	78,110			51,135			129,245
Other assets	6,159			2,793			8,952
Deferred income taxes	(26,591		)	313			(26,278		)
Current liabilities assumed	(63,513		)	(52,961		)	(116,474		)
Debt assumed	—			(32,441		)	(32,441		)
Other noncurrent liabilities assumed	(11,675		)	(10,573		)	(22,248		)
Contingent consideration liabilities	—			(5,854		)	(5,854		)
Other purchase price obligations	(13,351		)	(333		)	(13,684		)
Notes issued	(31,500		)	(13,535		)	(45,035		)
Settlement of pre-existing balances	—			(5,052		)	(5,052		)
Cash used in acquisitions, net of cash acquired	$	427,050		$	334,304		$	761,354

The primary reason for our acquisitions made during the six months ended June 30, 2015 and the year ended December 31, 2014 was to create economic value for our stockholders by enhancing our position as a leading source for alternative collision and mechanical repair products and expanding into other product lines and businesses that may benefit from our operating strengths. Our acquisition of Keystone Specialty allows us to enter into new product lines and increase the size of our addressable market. In addition, we believe that the acquisition creates logistics and administrative cost synergies as well as cross-selling opportunities, which contributed to the goodwill recorded on the Keystone Specialty acquisition. Other acquisitions completed during 2014 and 2015 enabled us to expand our distribution network in the Netherlands, and expand our geographic presence.

When we identify potential acquisitions, we attempt to target companies with a leading market share, an experienced management team and workforce that provide a fit with our existing operations, and strong cash flows. For certain of our

acquisitions, we have identified cost savings and synergies as a result of integrating the company with our existing business that provide additional value to the combined entity. In many cases, acquiring companies with these characteristics will result in purchase prices that include a significant amount of goodwill.

The following pro forma summary presents the effect of the businesses acquired during the six months ended June 30, 2015 as though the businesses had been acquired as of January 1, 2014 and the businesses acquired during the year ended December 31, 2014, including the Keystone Specialty acquisition on January 3, 2014, as though they had been acquired as of January 1, 2013. The pro forma adjustments are based upon unaudited financial information of the acquired entities (in thousands, except per share data):



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Revenue, as reported	$	1,838,070	$	1,709,132	$	3,611,982	$	3,334,909
Revenue of purchased businesses for the period prior to acquisition:
Keystone Specialty	—		—		—		3,443
Other acquisitions	6,726		132,610		28,193		278,764
Pro forma revenue	$	1,844,796	$	1,841,742	$	3,640,175	$	3,617,116

Net income, as reported	$	119,722	$	104,882	$	226,817	$	209,535
Net income of purchased businesses for the period prior to acquisition, and pro forma purchase accounting adjustments:
Keystone Specialty	—		144		—		408
Other acquisitions	921		6,255		2,620		8,906
Pro forma net income	$	120,643	$	111,281	$	229,437	$	218,849

Earnings per share, basic—as reported	$	0.39	$	0.35	$	0.75	$	0.69
Effect of purchased businesses for the period prior to acquisition:
Keystone Specialty	—		0.00		—		0.00
Other acquisitions	0.00		0.02		0.01		0.03
Pro forma earnings per share, basic ⁽¹⁾	$	0.40	$	0.37	$	0.75	$	0.73

Earnings per share, diluted—as reported	$	0.39	$	0.34	$	0.74	$	0.69
Effect of purchased businesses for the period prior to acquisition:
Keystone Specialty	—		0.00		—		0.00
Other acquisitions	0.00		0.02		0.01		0.03
Pro forma earnings per share, diluted ⁽¹⁾	$	0.39	$	0.36	$	0.75	$	0.72

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

Unaudited pro forma supplemental information is based upon accounting estimates and judgments that we believe are reasonable. The unaudited pro forma supplemental information includes the effect of purchase accounting adjustments, such as the adjustment of inventory acquired to net realizable value, adjustments to depreciation on acquired property 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. Additionally, the pro forma impact of our Keystone Specialty acquisition reflects the elimination of acquisition related expenses totaling $0.2 million for the six months ended June 30, 2014, which do not have a continuing impact on our operating results. Refer to Note 9, "Restructuring and Acquisition Related Expenses," for further information regarding our acquisition related expenses. These pro forma results are not necessarily indicative of what would have occurred if the acquisitions had been in effect for the periods presented or of future results.


Note 9.	Restructuring and Acquisition Related Expenses

Acquisition Related Expenses

Acquisition related expenses, which include external costs such as legal, accounting and advisory fees, totaled $0.7 million and $1.3 million for the three and six months ended June 30, 2015, respectively. Expenses incurred during the three and six months ended June 30, 2014 totaled $1.7 million and $1.9 million, respectively. Of our 2015 expenses, $1.0 million was related to the acquisitions of seven aftermarket distribution businesses in the Netherlands during the first half of 2015 and $0.3 million was related to potential acquisitions. The expenses incurred in the first half of 2014 were primarily related to our acquisitions of five aftermarket distribution businesses in the Netherlands.

Acquisition Integration Plans

During the three and six months ended June 30, 2015, we incurred $0.9 million and $6.9 million of restructuring expenses, respectively. Expenses incurred during the three and six months ended June 30, 2015 were primarily a result of the integration of our October 2014 acquisition of a supplier of parts for recreational vehicles into our Specialty business.

During the three and six months ended June 30, 2014, we incurred $4.2 million and $7.4 million of restructuring expenses, respectively. Expenses incurred during the six months ended June 30, 2014 were primarily a result of the integration of our acquisition of Keystone Specialty into our existing business. These integration activities included the closure of duplicate facilities, termination of employees in connection with the consolidation of overlapping facilities with our existing business, moving expenses, and other third party services directly related to our acquisitions.

We expect to incur additional expenses related to the integration of certain of our acquisitions into our existing operations throughout 2015. These integration activities are expected to include the closure of duplicate facilities, termination of employees in connection with the consolidation of overlapping facilities with our existing business, and moving expenses. Future expenses to complete these integration plans are expected to be less than $5.0 million.


Note 10.	Earnings Per Share

The following chart sets forth the computation of earnings per share (in thousands, except per share amounts):



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Net Income	$	119,722	$	104,882	$	226,817	$	209,535
Denominator for basic earnings per share—Weighted-average shares outstanding	304,286		302,030		304,145		301,719
Effect of dilutive securities:
RSUs	732		821		700		876
Stock options	2,229		2,981		2,260		3,074
Restricted stock	—		5		—		8
Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding	307,247		305,837		307,105		305,677
Earnings per share, basic	$	0.39	$	0.35	$	0.75	$	0.69
Earnings per share, diluted	$	0.39	$	0.34	$	0.74	$	0.69

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 six months ended June 30, 2015 and 2014 (in thousands):



	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2015	2014	2015	2014
Antidilutive securities:
RSUs	310	405	323	203
Stock options	98	117	99	122


Note 11.	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 six months ended June 30, 2015 was 35.2% compared with 34.0% for the comparable prior year period. The higher effective income tax rate for the six months ended June 30, 2015 is primarily a result of our expected geographic distribution of income, as we expect a smaller proportion of our annual pretax income will be earned in the typically lower tax rate international jurisdictions. In addition, the tax provision for the first six months of 2015 includes unfavorable discrete items of $0.3 million primarily as a result of U.S. state deferred tax adjustments, compared to $0.1 million of unfavorable discrete items during the prior year period.


Note 12.	Accumulated Other Comprehensive Income (Loss)

The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands):



	Three Months Ended												Three Months Ended
	June 30, 2015												June 30, 2014
	Foreign Currency Translation			Unrealized (Loss) Gain on Cash Flow Hedges			Unrealized (Loss) Gain on Pension Plan			Accumulated Other Comprehensive (Loss) Income			Foreign Currency Translation		Unrealized (Loss) Gain on Cash Flow Hedges			Unrealized Gain (Loss) on Pension Plan			Accumulated Other Comprehensive Income (Loss)
Beginning balance	$	(81,883	)	$	(3,118	)	$	(9,623	)	$	(94,624	)	$	24,343	$	(4,803	)	$	664		$	20,204
Pretax income (loss)	44,510			(166		)	—			44,344			15,879		466			—			16,345
Income tax effect	—			69			—			69			—		(122		)	—			(122		)
Reclassification of unrealized gain (loss)	—			1,564			(27		)	1,537			—		133			(43		)	90
Reclassification of deferred income taxes	—			(549		)	6			(543		)	—		(20		)	13			(7		)
Ending Balance	$	(37,373	)	$	(2,200	)	$	(9,644	)	$	(49,217	)	$	40,222	$	(4,346	)	$	634		$	36,510



	Six Months Ended												Six Months Ended
	June 30, 2015												June 30, 2014
	Foreign Currency Translation			Unrealized (Loss) Gain on Cash Flow Hedges			Unrealized (Loss) Gain on Pension Plan			Accumulated Other Comprehensive (Loss) Income			Foreign Currency Translation		Unrealized (Loss) Gain on Cash Flow Hedges			Unrealized Gain (Loss) on Pension Plan			Accumulated Other Comprehensive Income (Loss)
Beginning balance	$	(27,073	)	$	(3,401	)	$	(9,751	)	$	(40,225	)	$	24,906	$	(5,596	)	$	701		$	20,011
Pretax (loss) income	(10,300		)	(1,239		)	—			(11,539		)	15,316		(176		)	—			15,140
Income tax effect	—			439			—			439			—		46			—			46
Reclassification of unrealized gain (loss)	—			3,085			143			3,228			—		2,093			(90		)	2,003
Reclassification of deferred income taxes	—			(1,084		)	(36		)	(1,120		)	—		(713		)	23			(690		)
Ending Balance	$	(37,373	)	$	(2,200	)	$	(9,644	)	$	(49,217	)	$	40,222	$	(4,346	)	$	634		$	36,510

Unrealized losses on our interest rate swap contracts totaling $1.6 million and $3.1 million were reclassified to interest expense in our Unaudited Condensed Consolidated Statements of Income during the three and six months ended June 30, 2015, respectively. During the three and six months ended June 30, 2014, unrealized losses of $1.6 million and $3.1 million, respectively related to our interest rate swaps were reclassified to interest expense. The remaining reclassification of unrealized gains during the three and six months ended June 30, 2014 related to our foreign currency forward contracts and was recorded to other income in our our Unaudited Condensed Consolidated Statements of Income. These gains offset the remeasurement of certain of our intercompany balances. The deferred income taxes related to our cash flow hedges were reclassified from Accumulated Other Comprehensive Income to income tax expense.


Note 13.	Segment and Geographic Information

We have four operating segments: Wholesale – North America; Wholesale – Europe; Self Service; and Specialty. 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.

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 June 30, 2015
Revenue:
Third Party	$	1,044,779	$	509,833	$	283,458	$	—		$	1,838,070
Intersegment	372		70		872		(1,314		)	—
Total segment revenue	$	1,045,151	$	509,903	$	284,330	$	(1,314	)	$	1,838,070
Segment EBITDA	$	138,880	$	53,943	$	40,198	$	—		$	233,021
Depreciation and amortization	17,249		8,704		5,092		—			31,045
Three Months Ended June 30, 2014
Revenue:
Third Party	$	1,025,989	$	465,173	$	217,970	$	—		$	1,709,132
Intersegment	101		—		430		(531		)	—
Total segment revenue	$	1,026,090	$	465,173	$	218,400	$	(531	)	$	1,709,132
Segment EBITDA	$	137,150	$	45,945	$	28,356	$	—		$	211,451
Depreciation and amortization	17,508		8,491		5,048		—			31,047



	North America		Europe		Specialty		Eliminations			Consolidated
Six Months Ended June 30, 2015
Revenue:
Third Party	$	2,090,858	$	997,179	$	523,945	$	—		$	3,611,982
Intersegment	466		70		1,607		(2,143		)	—
Total segment revenue	$	2,091,324	$	997,249	$	525,552	$	(2,143	)	$	3,611,982
Segment EBITDA	$	288,268	$	100,466	$	65,602	$	—		$	454,336
Depreciation and amortization	34,515		17,055		10,144		—			61,714
Six Months Ended June 30, 2014
Revenue:
Third Party	$	2,055,255	$	884,887	$	394,767	$	—		$	3,334,909
Intersegment	134		—		656		(790		)	—
Total segment revenue	$	2,055,389	$	884,887	$	395,423	$	(790	)	$	3,334,909
Segment EBITDA	$	283,288	$	87,100	$	46,160	$	—		$	416,548
Depreciation and amortization	34,653		15,457		8,783		—			58,893

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 and administrative expenses are allocated to the segments based on usage, with shared expenses apportioned based

on the segment's percentage of consolidated revenue. Segment EBITDA is calculated as EBITDA excluding restructuring and acquisition related expenses, change in fair value of contingent consideration liabilities and equity in earnings of unconsolidated subsidiaries. EBITDA, which is the basis for Segment EBITDA, is calculated as net income excluding depreciation, amortization, interest (including loss on debt extinguishment) and taxes. Loss on debt extinguishment is considered a component of interest in calculating EBITDA, as the write-off of debt issuance costs is similar to the treatment of debt issuance cost amortization.

The table below provides a reconciliation from Segment EBITDA to Net Income (in thousands):



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Segment EBITDA	$	233,021		$	211,451		$	454,336		$	416,548
Deduct:
Restructuring and acquisition related expenses ⁽¹⁾	1,663			5,901			8,151			9,222
Change in fair value of contingent consideration liabilities ⁽²⁾	125			(790		)	276			(2,012		)
Add:
Equity in earnings of unconsolidated subsidiaries	(1,162		)	(442		)	(3,070		)	(478		)
EBITDA	230,071			205,898			442,839			408,860
Depreciation and amortization	31,045			31,047			61,714			58,893
Interest expense, net	14,622			15,628			29,528			31,746
Loss on debt extinguishment	—			—			—			324
Provision for income taxes	64,682			54,341			124,780			108,362
Net income	$	119,722		$	104,882		$	226,817		$	209,535

⁽¹⁾See Note 9, "Restructuring and Acquisition Related Expenses," for further information.

⁽²⁾See Note 6, "Fair Value Measurements," for further information on our contingent consideration liabilities.

The following table presents capital expenditures, which includes additions to property and equipment, by reportable segment (in thousands):



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Capital Expenditures
North America	$	14,744	$	21,355	$	30,147	$	40,276
Europe	22,303		10,824		30,172		24,275
Specialty	3,620		1,436		6,444		2,780
	$	40,667