10-Q 1 lkq-2017033110xq.htm 10-Q Document

 

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 March 31, 2017
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)
____________________________ 
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, smaller reporting company, or 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 filer
x
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Emerging growth 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 April 21, 2017, the registrant had issued and outstanding an aggregate of 308,285,252 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
 
March 31,
 
2017
 
2016
Revenue
$
2,342,843

 
$
1,921,476

Cost of goods sold
1,412,750

 
1,161,039

Gross margin
930,093

 
760,437

Facility and warehouse expenses
189,780

 
157,605

Distribution expenses
185,810

 
152,343

Selling, general and administrative expenses
267,227

 
218,318

Restructuring and acquisition related expenses
2,928

 
14,811

Depreciation and amortization
48,656

 
31,688

Operating income
235,692

 
185,672

Other expense (income):
 
 
 
Interest expense, net
23,988

 
14,592

Loss on debt extinguishment

 
26,650

Gains on foreign exchange contracts - acquisition related

 
(18,342
)
Other income, net
(1,046
)
 
(2,889
)
Total other expense, net
22,942

 
20,011

Income from continuing operations before provision for income taxes
212,750

 
165,661

Provision for income taxes
72,155

 
53,128

Equity in earnings (loss) of unconsolidated subsidiaries
214

 
(362
)
Income from continuing operations
140,809

 
112,171

Loss from discontinued operations, net of tax
(4,531
)
 

Net income
$
136,278

 
$
112,171

Basic earnings per share:
 
 
 
Income from continuing operations
$
0.46

 
$
0.37

Loss from discontinued operations
(0.01
)
 

Net income (1)
$
0.44

 
$
0.37

Diluted earnings per share:
 
 
 
Income from continuing operations
$
0.45

 
$
0.36

Loss from discontinued operations
(0.01
)
 

Net income (1)
$
0.44

 
$
0.36

(1) 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 consolidated financial statements.
2



Unaudited Condensed Consolidated Statements of Comprehensive Income
(In thousands)
 
Three Months Ended
 
March 31,
 
2017
 
2016
Net income
$
136,278

 
$
112,171

Other comprehensive income (loss):
 
 
 
Foreign currency translation
21,579

 
140

Net change in unrecognized gains/losses on derivative instruments, net of tax
3,163

 
432

Net change in unrealized gains/losses on pension plans, net of tax
(3,041
)
 
147

Net change in other comprehensive loss from unconsolidated subsidiaries
(162
)
 

Total other comprehensive income
21,539

 
719

Total comprehensive income
$
157,817

 
$
112,890


The accompanying notes are an integral part of the consolidated financial statements.
3




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
 
March 31,
 
December 31,
 
2017
 
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
264,614

 
$
227,400

Receivables, net
973,670

 
860,549

Inventories
1,978,465

 
1,935,237

Prepaid expenses and other current assets
101,377

 
87,768

Assets of discontinued operations

 
456,640

Total current assets
3,318,126

 
3,567,594

Property and equipment, net
809,208

 
811,576

Intangible assets:
 
 
 
Goodwill
3,120,844

 
3,054,769

Other intangibles, net
576,451

 
584,231

Equity method investments
185,262

 
183,467

Other assets
112,355

 
101,562

Total assets
$
8,122,246

 
$
8,303,199

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
651,117

 
$
633,773

Accrued expenses:
 
 
 
Accrued payroll-related liabilities
89,977

 
118,755

Other accrued expenses
243,018

 
209,101

Other current liabilities
83,601

 
37,943

Current portion of long-term obligations
91,988

 
66,109

Liabilities of discontinued operations

 
145,104

Total current liabilities
1,159,701

 
1,210,785

Long-term obligations, excluding current portion
2,933,277

 
3,275,662

Deferred income taxes
221,504

 
199,657

Other noncurrent liabilities
200,893

 
174,146

Commitments and contingencies
 
 

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 308,283,752 and 307,544,759 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
3,083

 
3,075

Additional paid-in capital
1,122,787

 
1,116,690

Retained earnings
2,726,637

 
2,590,359

Accumulated other comprehensive loss
(245,636
)
 
(267,175
)
Total stockholders’ equity
3,606,871

 
3,442,949

Total liabilities and stockholders’ equity
$
8,122,246

 
$
8,303,199

    

The accompanying notes are an integral part of the consolidated financial statements.
4



LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
 
Three Months Ended
 
March 31,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
136,278

 
$
112,171

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
50,604

 
33,166

Stock-based compensation expense
7,285

 
5,916

Loss on debt extinguishment

 
26,650

Loss on sale of business
8,580

 

Gains on foreign exchange contracts - acquisition related

 
(18,342
)
Other
1,343

 
1,156

Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:
 
 
 
Receivables, net
(108,893
)
 
(78,373
)
Inventories
(745
)
 
18,973

Prepaid income taxes/income taxes payable
61,064

 
41,152

Accounts payable
24,449

 
20,514

Other operating assets and liabilities
(7,672
)
 
(28,139
)
Net cash provided by operating activities
172,293

 
134,844

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(44,398
)
 
(50,393
)
Acquisitions, net of cash acquired
(77,056
)
 
(603,735
)
Proceeds from disposals of business/investment
301,297

 
10,304

Proceeds from foreign exchange contracts

 
18,342

Other investing activities, net
1,314

 
458

Net cash provided by (used in) investing activities
181,157

 
(625,024
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from exercise of stock options
2,464

 
3,202

Taxes paid related to net share settlements of stock-based compensation awards
(3,644
)
 
(2,281
)
Debt issuance costs

 
(5,907
)
Borrowings under revolving credit facilities
45,239

 
1,143,217

Repayments under revolving credit facilities
(389,313
)
 
(345,609
)
Borrowings under term loans

 
338,478

Repayments under term loans
(9,295
)
 

Borrowings under receivables securitization facility

 
97,000

Repayments under receivables securitization facility
(150
)
 
(63,000
)
Borrowings of other debt, net
23,313

 
12,850

Payments of Rhiag debt and related payments

 
(543,347
)
Payments of other obligations

 
(1,437
)
Other financing activities, net
5,000

 

Net cash (used in) provided by financing activities
(326,386
)
 
633,166

Effect of exchange rate changes on cash and cash equivalents
3,034

 
(1,163
)
Net increase in cash and cash equivalents
30,098

 
141,823

Cash and cash equivalents of continuing operations, beginning of period
227,400

 
87,397

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
234,516

 
87,397

Cash and cash equivalents, end of period
$
264,614

 
$
229,220

Supplemental disclosure of cash paid for:
 
 
 
Income taxes, net of refunds
$
13,746

 
$
7,715

Interest
10,965

 
19,320

Supplemental disclosure of noncash investing and financing activities:
 
 
 
Contingent consideration liabilities
$
10,969

 
$

Notes payable and other financing obligations, including notes issued and debt assumed in connection with business acquisitions

 
551,077

Noncash property, plant and equipment additions
2,936

 
5,469

Notes and other financing receivables in connection with disposals of business/investment
5,848

 


The accompanying notes are an integral part of the consolidated financial statements.
5



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) Income
 
Total
Stockholders’
Equity
 
Shares
Issued
 
Amount
 
BALANCE, January 1, 2017
307,545

 
$
3,075

 
$
1,116,690

 
$
2,590,359

 
$
(267,175
)
 
$
3,442,949

Net income

 

 

 
136,278

 

 
136,278

Other comprehensive income

 

 

 

 
21,539

 
21,539

Restricted stock units vested, net of shares withheld for employee tax
450

 
4

 
(2,760
)
 

 

 
(2,756
)
Stock-based compensation expense

 

 
7,285

 

 

 
7,285

Exercise of stock options
308

 
3

 
2,461

 

 

 
2,464

Tax withholdings related to net share settlements of stock-based compensation awards
(19
)
 
1

 
(889
)
 

 

 
(888
)
BALANCE, March 31, 2017
308,284

 
$
3,083

 
$
1,122,787

 
$
2,726,637

 
$
(245,636
)
 
$
3,606,871

     

The accompanying notes are an integral part of the consolidated financial statements.
6



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 ("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 most recent Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on February 27, 2017.

Note 2.
Business Combinations
During the three months ended March 31, 2017, we completed three acquisitions, including a wholesale business in North America, a wholesale business in Europe and a Specialty vehicle aftermarket business. Total acquisition date fair value of the consideration for these acquisitions was $91.2 million, composed of $77.1 million of cash paid (net of cash acquired) and $14.1 million of other purchase price obligations. We typically fund our acquisitions using borrowings under our credit facilities or other financing arrangements. During the three months ended March 31, 2017, we recorded $42.8 million of goodwill related to these acquisitions, of which we expect $39.0 million to be deductible for income tax purposes. These acquisitions were not material to our results of operations or financial position as of and for the three months ended March 31, 2017.
On March 18, 2016, LKQ acquired Rhiag-Inter Auto Parts Italia S.p.A. ("Rhiag"), a distributor of aftermarket spare parts for passenger cars and commercial vehicles in Italy, Czech Republic, Slovakia, Switzerland, Hungary, Romania, Ukraine, Bulgaria, Poland and Spain. This acquisition expanded LKQ's geographic presence in continental Europe, and we believe the acquisition will generate potential purchasing synergies. Total acquisition date fair value of the consideration for our Rhiag acquisition was €534.2 million ($602.0 million), composed of €533.6 million ($601.4 million) of cash paid (net of cash acquired) and €0.6 million ($0.6 million) of intercompany balances considered to be effectively settled as part of the transaction. In addition, we assumed €488.8 million ($550.8 million) of existing Rhiag debt as of the acquisition date. We recorded $590.7 million ($585.4 million of adjustments in 2016 and $5.3 million of adjustments in the three months ended March 31, 2017) of goodwill related to our acquisition of Rhiag, which we do not expect to be deductible for income tax purposes.
Related to the funding of the purchase price of the Rhiag acquisition, LKQ entered into foreign currency forward contracts in March 2016 to acquire a total of €588 million. The rates locked in under the foreign currency forwards were favorable to the spot rate on the settlement date, and as a result, these derivative contracts generated a gain of $18.3 million during the year ended December 31, 2016. The gain on the foreign currency forwards was recorded in Gains on foreign exchange contracts - acquisition related on our Unaudited Condensed Consolidated Statement Of Income for the year ended December 31, 2016.     
On April 21, 2016, LKQ acquired Pittsburgh Glass Works LLC (“PGW”). At acquisition, PGW’s business comprised aftermarket automotive replacement glass distribution services and automotive glass manufacturing. The acquisition expanded our addressable market in North America. Additionally, we believe the acquisition will create potential distribution synergies with our existing network. Total acquisition date fair value of the consideration for our PGW acquisition was $661.7 million, consisting of cash paid (net of cash acquired). We recorded $207.6 million ($205.1 million in 2016 and $2.5 million in the three months ended March 31, 2017) of goodwill related to our acquisition of PGW, of which we expect $104.0 million to be deductible for income tax purposes.
On October 4, 2016, we acquired substantially all of the business assets of Andrew Page Limited ("Andrew Page"), a distributor of aftermarket automotive parts in the U.K., out of receivership. The acquisition is subject to regulatory approval by

7



the Competition and Markets Authority ("CMA") in the U.K. The CMA's review is ongoing as of the date of this report. Total acquisition date fair value of the consideration for this acquisition was £16.4 million ($20.9 million). In connection with the acquisition, we recorded a gain on bargain purchase of $8.2 million, which is recorded on a separate line in our consolidated statement of income for the year ended December 31, 2016. We believe that we were able to acquire the net assets of Andrew Page for less than fair value as a result of (i) Andrew Page's financial difficulties that put the company into receivership prior to our acquisition and (ii) a motivated seller that desired to complete the sale in an expedient manner to ensure continuity of the business. We continue to evaluate the purchase price allocation, including the opening value of inventory, fixed assets, intangible assets, accrued liabilities, and deferred taxes, which may require us to adjust the recorded gain.
In addition to our acquisitions of Rhiag, PGW and Andrew Page, we acquired seven wholesale businesses in Europe and five wholesale businesses in North America during the year ended December 31, 2016. Total acquisition date fair value of the consideration for these acquisitions was $76.1 million, composed of $67.8 million of cash paid (net of cash acquired), $4.1 million of notes payable and $4.2 million of other purchase price obligations. During the year ended December 31, 2016, we recorded $52.3 million of goodwill related to these acquisitions and immaterial adjustments to preliminary purchase price allocations related to certain of our 2015 acquisitions. We expect that substantially all of the goodwill recorded for these acquisitions will not 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 three months ended March 31, 2017 and the last nine months of the year ended December 31, 2016 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.
From the date of our preliminary allocation for Rhiag in the first quarter of 2016 through March 31, 2017, we recorded adjustments based on our valuation procedures for our acquisition of Rhiag that resulted in the allocation of $149.0 million of goodwill to acquired assets, primarily intangible assets and property and equipment; this amount includes a $5.3 million increase to goodwill recorded in the first quarter of 2017, primarily attributable to a decline in the value allocated to property and equipment. Additionally, from the date of our preliminary allocation for PGW in the second quarter of 2016 through March 31, 2017, we recorded adjustments based on our valuation procedures that resulted in a $23.6 million increase to goodwill recorded for our PGW acquisition, of which $2.5 million was recorded in the first quarter of 2017. These adjustments were primarily attributable to a decline in the value allocated to property and equipment, partially offset by an increase in the value allocated to deferred taxes. The income statement effect of the Rhiag and PGW measurement period adjustments 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 was immaterial.

8



The preliminary purchase price allocations for the acquisitions completed during the three months ended March 31, 2017 and the year ended December 31, 2016 are as follows (in thousands):
 
Three Months Ended
 
Year Ended
 
March 31, 2017
 
December 31, 2016
 
All Acquisitions (1)
 
Rhiag
 
PGW (2)
 
Other Acquisitions
 
Total
Receivables
$
10,788

 
$
230,670

 
$
136,523

 
$
13,216

 
$
380,409

Receivable reserves

 
(28,242
)
 
(7,135
)
 
(794
)
 
(36,171
)
Inventories (3)
35,567

 
239,529

 
169,159

 
62,223

 
470,911

Prepaid expenses and other current assets
(2,718
)
 
10,793

 
42,573

 
4,445

 
57,811

Property and equipment
(6,299
)
 
56,774

 
225,645

 
17,140

 
299,559

Goodwill
50,570

 
585,415

 
205,058

 
52,336

 
842,809

Other intangibles
8,055

 
429,360

 
37,954

 
2,537

 
469,851

Other assets (4)
1,113

 
2,092

 
57,671

 
(133
)
 
59,630

Deferred income taxes
948

 
(110,791
)
 
17,506

 
(1,000
)
 
(94,285
)
Current liabilities assumed
(6,845
)
 
(239,665
)
 
(168,332
)
 
(42,290
)
 
(450,287
)
Debt assumed

 
(550,843
)
 
(4,027
)
 
(2,378
)
 
(557,248
)
Other noncurrent liabilities assumed

 
(23,085
)
 
(50,847
)
 
(103
)
 
(74,035
)
Contingent consideration liabilities
(10,969
)
 

 

 

 

Other purchase price obligations
(3,154
)
 

 

 
(6,698
)
 
(6,698
)
Notes issued

 

 

 
(4,087
)
 
(4,087
)
Settlement of pre-existing balances

 
(591
)
 

 
(32
)
 
(623
)
Gain on bargain purchase

 

 

 
(8,207
)
 
(8,207
)
Cash used in acquisitions, net of cash acquired
$
77,056

 
$
601,416

 
$
661,748

 
$
86,175

 
$
1,349,339

(1)
Includes $6.4 million and $3.1 million of adjustments to reduce property and equipment and other current assets for Rhiag and PGW, respectively.
(2)
Includes both continuing and discontinued operations of PGW. See Note 3, "Discontinued Operations" for further information on our discontinued operations.
(3)
The PGW inventory balance includes the impact of a $9.8 million step-up adjustment to report the inventory at its fair value.
(4)
The balance for PGW includes $23.6 million of investments in unconsolidated subsidiaries which relate to the discontinued portion of our PGW operations.
The fair value of our intangible assets is based on a number of inputs including projections of future cash flows, assumed royalty rates and customer attrition rates, all of which are Level 3 inputs. The fair value of our property 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 are not observable in the market, and therefore, these inputs are considered to be Level 3 inputs.
Other noncurrent liabilities recorded for our acquisitions of Rhiag and PGW includes a liability for certain pension and other post-retirement obligations we assumed with the acquisitions. A portion of PGW's liability for pension and post-retirement obligations relates to the glass manufacturing operations business, which is classified as discontinued operations, and was recorded within Liabilities of discontinued operations on our consolidated balance sheet as of December 31, 2016; these amounts were included in the net assets disposed as part of the sale of the business, which occurred in the first quarter of 2017. Due to the immateriality of our pension plans for our continuing operations, we have not provided the detailed disclosures otherwise prescribed by the accounting guidance on pensions and other post-retirement obligations.
The primary objectives of our acquisitions made during the three months ended March 31, 2017 and the year ended December 31, 2016 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. Our 2016 acquisition of Rhiag enabled us to expand our market presence in continental Europe. We believe that our Rhiag acquisition will allow for synergies within our European operations, most notably in procurement,

9



and these projected synergies contributed to the goodwill recorded on the Rhiag acquisition. The aftermarket automotive glass distribution business of PGW, which is included within continuing operations, enabled us to enter into new product lines and increase the size of our addressable market. In addition, we believe that the aftermarket automotive glass distribution business of our PGW acquisition will allow for distribution synergies with our existing network in North America, which contributed to the goodwill recorded on the acquisition.
When we identify potential acquisitions, we attempt to target companies with a leading market presence, an experienced management team and workforce that provide a fit with our existing operations, and strong cash flows. For certain of our acquisitions, we have identified cost savings and synergies as a result of integrating the company with our existing business that provide additional value to the combined entity. In many cases, acquiring companies with these characteristics will result in purchase prices that include a significant amount of goodwill.
The following pro forma summary presents the effect of the businesses acquired during the three months ended March 31, 2017 as though the businesses had been acquired as of January 1, 2016, and the businesses acquired during the year ended December 31, 2016 as though they had been acquired as of January 1, 2015. The pro forma adjustments are based upon unaudited financial information of the acquired entities (in thousands, except per share data):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Revenue, as reported
$
2,342,843

 
$
1,921,476

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

 
213,376

PGW (1)

 
83,034

Other acquisitions
9,554

 
105,149

Pro forma revenue
$
2,352,397

 
$
2,323,035

 
 
 
 
Income from continuing operations, as reported
$
140,809

 
$
112,171

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

 
(203
)
PGW (1),(2)

 
6,838

Other acquisitions
817

 
1,229

Acquisition related expenses, net of tax (3)
411

 
8,494

Pro forma income from continuing operations
$
142,037

 
$
128,529

 
 
 
 
Earnings per share from continuing operations, basic—as reported
$
0.46

 
$
0.37

Effect of purchased businesses for the period prior to acquisition:
 
 
 
Rhiag

 
(0.00)

PGW (1),(2)

 
0.02

Other acquisitions
0.00

 
0.00

Acquisition related expenses, net of tax (3)
0.00

 
0.03

Pro forma earnings per share from continuing operations, basic (4) 
$
0.46

 
$
0.42

 
 
 
 
Earnings per share from continuing operations, diluted—as reported
$
0.45

 
$
0.36

Effect of purchased businesses for the period prior to acquisition:
 
 
 
Rhiag

 
(0.00)

PGW (1),(2)

 
0.02

Other acquisitions
0.00

 
0.00

Acquisition related expenses, net of tax (3)
0.00

 
0.03

Pro forma earnings per share from continuing operations, diluted (4) 
$
0.46

 
$
0.42

(1)
PGW reflects the results for the continuing aftermarket automotive glass distribution business only.

10



(2)
Excludes $4.4 million of corporate costs for the three months ended March 31, 2016 that we do not expect to incur going forward as a result of the sale of our glass manufacturing business.
(3)
Includes expenses related to acquisitions closed in the period and excludes expenses for acquisitions not yet completed.
(4)
The sum of the individual earnings per share amounts may not equal the total due to rounding.
Unaudited pro forma supplemental information is based upon accounting estimates and judgments that we believe are reasonable. The unaudited pro forma supplemental information includes the effect of purchase accounting adjustments, such as the adjustment of inventory acquired to fair value, adjustments to depreciation on acquired property 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 5, "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 3. Discontinued Operations
On March 1, 2017, LKQ completed the sale of the glass manufacturing business of its PGW subsidiary to a subsidiary of Vitro S.A.B. de C.V. (Vitro) for a sales price of $301.3 million, including cash received of $316.1 million, net of cash disposed of $14.8 million. In addition, we recorded a purchase price receivable of $3.6 million subject to post sale adjustments. As a result of 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 14, "Segment and Geographic Information" for further information regarding our segments.
Upon execution of the Stock and Asset Purchase Agreement (the "Vitro Agreement") in December 2016, LKQ concluded that the glass manufacturing business met the criteria to be classified as held for sale in LKQ’s consolidated financial statements. As a result, the assets related to the glass manufacturing business were reflected on the Consolidated Balance Sheet at the lower of the net asset carrying value or fair value less cost to sell as of December 31, 2016. The fair value of the assets was determined using the negotiated sale price as an indicator of fair value, which is considered a Level 2 input as it is observable in a non-active market.
As part of the Vitro Agreement, the Company and Vitro entered into a twelve-month Transition Services Agreement commencing on the transaction date with two six-month renewal periods, a three-year Purchase and Supply Agreement, and an Intellectual Property Agreement.
The following table summarizes the operating results of the Company’s discontinued operations related to the sale described above for the three months ended March 31, 2017 as presented in “Loss from discontinued operations, net of tax” on the Unaudited Condensed Consolidated Statements of Income (in thousands):
 
Period from January 1 to March 1,
 
 
2017
 
Revenue
$
111,130

 
Cost of goods sold
(100,084
)
 
Operating expenses
(8,369
)
 
    Operating income
2,677

 
Interest and other expenses, net
1,204

(1) 
    Income from discontinued operations before provision for income taxes
3,881

 
Provision for income taxes
(3,598
)
(2) 
Equity in earnings (loss) of unconsolidated subsidiaries
(534
)
 
    Loss from discontinued operations, net of tax
(251
)
 
Loss on sale of discontinued operations, net of tax
(4,280
)
(3) 
     Net loss from discontinued operations, net of tax
$
(4,531
)
 
(1)
The Company elected to allocate interest expense to discontinued operations based on the expected debt to be repaid. Under this approach, allocated interest through the period ended March 1, 2017 was $1.6 million. Partially offsetting this expense were foreign currency gains.
(2)
The provision for taxes includes a return to provision adjustment related to its international operations.

11



(3)
In the first quarter of 2017, upon closing of the sale and write-off of the net assets of the glass manufacturing business, we recorded a pre-tax loss on sale of $8.6 million, and a $4.3 million tax benefit. The incremental loss primarily reflects a $5.7 million payable for intercompany sales from the glass manufacturing business to the aftermarket automotive glass distribution business incurred prior to closing which will be paid by LKQ and capital expenditures in 2017 that were not reimbursed by the buyer.
The glass manufacturing business had $3.9 million of operating cash outflows, $3.6 million of investing cash outflows mainly consisting of capital expenditures, and $15.0 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 $7.8 million.

Note 4.
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 $40.7 million and $38.3 million at March 31, 2017 and December 31, 2016, 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 have a reserve for uncollectible accounts which was approximately $45.2 million and $45.6 million at March 31, 2017 and December 31, 2016, respectively.
Inventories
Inventories consists of the following (in thousands):
 
March 31,
 
December 31,
 
2017
 
2016
Aftermarket and refurbished products
$
1,557,363

 
$
1,540,257

Salvage and remanufactured products
421,102

 
394,980

Total inventories
$
1,978,465

 
$
1,935,237

Our acquisitions completed during 2017 contributed $35.6 million of the increase in our salvage and remanufactured products inventory during 2017. See Note 2, "Business Combinations" for further information on our acquisitions.
Intangible Assets
Intangible assets consist primarily of goodwill (the cost of purchased businesses in excess of the fair value of the identifiable net assets acquired) and other specifically identifiable intangible assets, such as trade names, trademarks, customer and supplier relationships, software and other technology related assets, and covenants not to compete.

12



The changes in the carrying amount of goodwill by reportable segment during the three months ended March 31, 2017 are as follows (in thousands):
 
North America (1)
 
Europe
 
Specialty (1)
 
Total
Balance as of January 1, 2017
$
1,661,800

 
$
1,099,976

 
$
292,993

 
$
3,054,769

Business acquisitions and adjustments to previously recorded goodwill
41,882

 
8,022

 
666

 
50,570

Exchange rate effects
1,077

 
14,479

 
(51
)
 
15,505

Balance as of March 31, 2017
$
1,704,759

 
$
1,122,477

 
$
293,608

 
$
3,120,844

(1)
In the first quarter of 2017, we realigned a portion of our North America operations under our Specialty segment. Prior year amounts have been recast to reflect the shift in reporting structure.
The components of other intangibles are as follows (in thousands):
 
March 31, 2017
 
December 31, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Trade names and trademarks
$
296,699

 
$
(59,734
)
 
$
236,965

 
$
286,008

 
$
(51,104
)
 
$
234,904

Customer and supplier relationships
403,126

 
(108,026
)
 
295,100

 
395,284

 
(92,079
)
 
303,205

Software and other technology related assets
83,028

 
(42,522
)
 
40,506

 
77,329

 
(35,648
)
 
41,681

Covenants not to compete
11,862

 
(7,982
)
 
3,880

 
11,726

 
(7,285
)
 
4,441

 
$
794,715

 
$
(218,264
)
 
$
576,451

 
$
770,347

 
$
(186,116
)
 
$
584,231

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
 
4-20 years
Software and other technology related assets
Straight-line
 
3-6 years
Covenants not to compete
Straight-line
 
1-5 years
Amortization expense for intangibles was $23.3 million and $8.9 million during the three months ended March 31, 2017 and 2016, respectively. Estimated amortization expense for each of the five years through the period ending December 31, 2021 is $69.4 million (for the remaining nine months of 2017), $77.3 million, $63.8 million, $50.3 million and $42.7 million, respectively.
Property and Equipment
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. Total depreciation expense was $27.3 million and $24.3 million during the three months ended March 31, 2017 and 2016, respectively.
Investments in Unconsolidated Subsidiaries
Our investment in unconsolidated subsidiaries was $185.3 million as of March 31, 2017. On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen AB ("Mekonomen") from AxMeko AB, an affiliate of Axel Johnson AB, for an aggregate purchase price of $181.3 million. Headquartered in Stockholm, Sweden, Mekonomen is the leading independent car parts and service chain in the Nordic region of Europe, offering a range of products including spare parts and accessories for cars, and workshop services for consumers and businesses. We are accounting for our interest in Mekonomen using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over the investee. As of March 31, 2017, the book value of our investment in Mekonomen exceeded our share of the book value of Mekonomen's net assets by $115.6 million; this difference is primarily related to goodwill and the fair value of other intangible assets. We are reporting our equity in the net earnings of Mekonomen on a one quarter lag, and therefore we recorded no equity in earnings

13



for this investment in 2016. For the three months ended March 31, 2017, we recorded equity in earnings totaling $0.3 million related to our investment in Mekonomen, which represents our share of the results from the investment date through December 31, 2016, including adjustments to convert the results to US GAAP and to recognize the impact of our purchase accounting adjustments. The level 1 fair value of our equity investment in the publicly traded Mekonomen common stock at March 31, 2017 was $187.3 million compared to a carrying value of $183.2 million.
Warranty Reserve
Some of our salvage mechanical products are sold with a standard six month warranty against defects. Additionally, some of our remanufactured engines are sold with a standard three year warranty against defects. We also provide a limited lifetime warranty for certain of our aftermarket products. We record the estimated warranty costs at the time of sale using historical warranty claim information to project future warranty claims activity. Our warranty reserve 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 January 1, 2017
$
19,634

Warranty expense
9,254

Warranty claims
(7,268
)
Balance as of March 31, 2017
$
21,620

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"). This update outlines a new comprehensive revenue recognition model that supersedes most current revenue recognition guidance and requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB has issued several updates to ASU 2014-09. 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 will continue to evaluate the potential effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures; however, we do not plan to early adopt. Entities adopting the standard have the option of using either a full retrospective or modified retrospective approach in the application of this guidance. We are still determining which method of transition we will follow. We are currently in the process of completing customer contract reviews, determining necessary adjustments to existing accounting policies, evaluating new disclosure requirements and identifying and implementing changes to business processes as deemed necessary to support recognition and disclosure under the new guidance. Based on our preliminary assessment, we do not expect a significant impact for the majority of our revenue transactions as they generally consist of single performance obligations to transfer promised goods or services; however, we do expect the new guidance will change the way we present sales returns in our consolidated financial statements. We are still in the process of determining the magnitude of impact for this change.
In February 2016, the FASB issued Accounting Standards Update 2016-02, "Leases" ("ASU 2016-02"), to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between current GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under current GAAP. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The standard requires that entities apply the effects of these changes using a modified retrospective approach, which includes a number of optional practical expedients. While we are still in the process of quantifying the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements and related disclosures, we anticipate the adoption will materially affect our consolidated balance sheet and disclosures, as the majority of our operating leases will be recorded on the balance sheet under ASU 2016-02. While we do not anticipate the adoption of this accounting standard to have a material impact on our consolidated statements of income at this time, this conclusion may change as we finalize our assessment. In order to assist in our timely implementation of the new standard, we have purchased new software to track our leases. We have engaged a third party to assist with the implementation of the new software with an expectation to complete the implementation by the end of 2017.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"), to add and clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASU 2016-15 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

14



identifiable cash flows where application of the predominance principle is prescribed. ASU 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017; early adoption is permitted. The guidance requires retrospective application to all periods presented unless it is impracticable to do so. We are still evaluating the impact that ASU 2016-15 will have on our consolidated financial statements and related disclosures, but we do not expect to early adopt in 2017.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, "Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"), which simplifies the accounting for goodwill impairment by eliminating step 2 from the goodwill impairment test. Under the new guidance, if the carrying value of a reporting unit exceeds the fair value, an impairment loss will be recognized for the amount of that excess, limited to the goodwill allocated to that reporting unit. ASU 2017-04 is effective for fiscal years and any interim impairment tests for periods beginning after December 15, 2019; early adoption is permitted for entities with annual and interim impairment tests occurring after January 1, 2017, and we plan to early adopt in 2017. The guidance requires adoption on a prospective basis. At this time, we do not expect adoption of this standard to have a significant impact on our financial position, results of operations, or cash flows.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, "Improvements to Employee Share-Based Payment Accounting" (“ASU 2016-09”), to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, the treatment of forfeitures, and calculation of earnings per share. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. During the third quarter of 2016, the Company elected to early adopt ASU 2016-09 effective January 1, 2016. With the adoption of ASU 2016-09, excess tax benefits are recognized as a component of the income tax provision, whereas these amounts were previously recognized in equity. The presentation of excess tax benefits on share-based payments was adjusted retrospectively within the Consolidated Statements of Cash Flows, resulting in a $4.6 million increase in operating cash flows for the three months ended March 31, 2016 with a corresponding decrease to financing cash flows.

Note 5.
Restructuring and Acquisition Related Expenses
Acquisition Related Expenses
Acquisition related expenses, which include external costs such as legal, accounting, and advisory fees, totaled $2.6 million and $12.7 million for the three months ended March 31, 2017 and 2016, respectively. Of our 2017 expenses, $0.5 million was related to our acquisition of Andrew Page, and the remaining $2.1 million was related to other completed acquisitions and acquisitions that were pending as of March 31, 2017. Of our 2016 expenses, $10.7 million was related to our acquisition of Rhiag, $1.8 million was related to our acquisition of PGW, and $0.2 million was related to other completed acquisitions and acquisitions that were pending as of March 31, 2016.
Acquisition Integration Plans
During the three months ended March 31, 2017 and 2016, we incurred $0.3 million and $2.1 million of restructuring expenses, respectively. Expenses incurred during the three months ended March 31, 2017 were primarily a result of the ongoing integration activities in our Specialty segment, which was formed in 2014 and subsequently expanded through acquisitions, including our 2015 Coast acquisition. Expenses incurred were primarily related to facility closure and the merger of existing facilities into larger distribution centers. Expenses incurred during the three months ended March 31, 2016 were primarily a result of the integration of our acquisition of Parts Channel into our existing North American wholesale business and the integration of our Coast acquisition into our existing Specialty business. Expenses incurred were primarily related to facility closure and relocation costs for duplicate facilities and the termination of employees.
We expect to incur additional expenses related to the integration of certain of our acquisitions into our existing operations in 2017. These integration activities are expected to include the closure of duplicate facilities, rationalization of personnel in connection with the consolidation of overlapping facilities with our existing business, and moving expenses. Future expenses to complete these integration plans are expected to be less than $5.0 million.

Note 6.
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.

15



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.
The fair value of RSUs that vested during the three months ended March 31, 2017 was $17.0 million.
The following table summarizes activity related to our RSUs under the Equity Incentive Plan for the three months ended March 31, 2017:
 
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, 2017
1,873,737

 
$
27.58

 
 
 
 
Granted
678,450

 
$
31.73

 
 
 
 
Vested
(537,512
)
 
$
25.84

 
 
 
 
Forfeited / Canceled
(75,302
)
 
$
31.68

 
 
 
 
Unvested as of March 31, 2017
1,939,373

 
$
29.36

 
 
 
 
Expected to vest after March 31, 2017
1,843,631

 
$
29.45

 
3.1
 
$
53,963

(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 three months ended March 31, 2017. The total grant-date fair value of options that vested during the three months ended March 31, 2017 was $0.7 million.
The following table summarizes activity related to our stock options under the Equity Incentive Plan for the three months ended March 31, 2017:
 
Number
Outstanding
 
Weighted
Average Exercise Price
 
Weighted Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
   (in thousands) (1)
Balance as of January 1, 2017
2,623,217

 
$
9.19

 
 
 
 
Exercised
(308,189
)
 
$
8.00

 
 
 
$
7,250

Forfeited / Canceled
(1,527
)
 
$
32.31

 
 
 
 
Balance as of March 31, 2017
2,313,501

 
$
9.33

 
2.1
 
$
46,360

Exercisable as of March 31, 2017
2,313,501

 
$
9.33

 
2.1
 
$
46,360

Exercisable as of March 31, 2017 and expected to vest thereafter
2,313,501

 
$
9.33

 
2.1
 
$
46,360

(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 the last day of the period indicated. This amount changes based on the market price of the Company’s common stock.

16



The following table summarizes the components of pre-tax stock-based compensation expense for our continuing operations (in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
RSUs
$
7,279

 
$
5,879

Stock options
6

 
37

Total stock-based compensation expense
$
7,285

 
$
5,916

As of March 31, 2017, unrecognized compensation expense related to unvested RSUs is $47.5 million. Stock-based compensation expense related to these awards will be different to the extent that forfeitures are realized.

Note 7.
Earnings Per Share
The following chart sets forth the computation of earnings per share (in thousands, except per share amounts):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Income from continuing operations
$
140,809

 
$
112,171

Denominator for basic earnings per share—Weighted-average shares outstanding
308,028

 
306,157

Effect of dilutive securities:
 
 
 
RSUs
564

 
580

Stock options
1,708

 
2,456

Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding
310,300

 
309,193

Basic earnings per share from continuing operations
$
0.46

 
$
0.37

Diluted earnings per share from continuing operations
$
0.45

 
$
0.36

The following table sets forth the number of employee stock-based compensation awards outstanding but not included in the computation of diluted earnings per share because their effect would have been antidilutive for the three months ended March 31, 2017 and 2016 (in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Antidilutive securities:
 
 
 
RSUs
147

 
228

Stock options
78

 
88



17



Note 8.
Accumulated Other Comprehensive Income (Loss)
The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands):
 
 
Three Months Ended
 
 
March 31, 2017
 
 
Foreign
Currency
Translation
 
Unrealized Gain
(Loss) on Cash Flow Hedges
 
Unrealized (Loss) Gain
on Pension Plans
 
Other Comprehensive (Loss) Income from Unconsolidated Subsidiaries
 
Accumulated
Other
Comprehensive
(Loss) Income
Beginning balance
 
$
(272,529
)
 
$
8,091

 
$
(2,737
)
 
$

 
$
(267,175
)
Pretax income
 
20,068

 
832

 
836

 

 
21,736

Income tax effect
 

 
(356
)
 
(318
)
 

 
(674
)
Reclassification of unrealized loss (gain)
 

 
4,257

 
(171
)
 

 
4,086

Reclassification of deferred income taxes
 

 
(1,570
)
 
48

 

 
(1,522
)
Disposal of business
 
1,511

 

 
(3,436
)
 

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

 

 

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

 
$
(5,778
)
 
$
(162
)
 
$
(245,636
)
    
 
 
Three Months Ended
 
 
March 31, 2016
 
 
Foreign
Currency
Translation
 
Unrealized (Loss) Gain
on Cash Flow Hedges
 
Unrealized (Loss) Gain
on Pension Plans
 
Other Comprehensive (Loss) Income from Unconsolidated Subsidiaries
 
Accumulated
Other
Comprehensive
(Loss) Income
Beginning balance
 
$
(96,890
)
 
$
(932
)
 
$
(7,648
)
 
$

 
$
(105,470
)
Pretax (loss) income
 
140

 
(165
)
 

 

 
(25
)
Income tax effect
 

 
49

 

 

 
49

Reclassification of unrealized loss
 

 
807

 
196

 

 
1,003

Reclassification of deferred income taxes
 

 
(259
)
 
(49
)
 

 
(308
)
Ending balance
 
$
(96,750
)
 
$
(500
)
 
$
(7,501
)
 
$


$
(104,751
)
Net unrealized gains on our interest rate swap contracts totaling $1.1 million and net unrealized losses of $0.8 million were reclassified to interest expense in our Unaudited Condensed Consolidated Statements of Income during the three months ended March 31, 2017 and 2016, respectively. We also reclassified a loss of $5.4 million related to our cross currency swaps to Other income, net in our Unaudited Condensed Consolidated Statements of Income during the three months ended March 31, 2017. The deferred income taxes related to our cash flow hedges were reclassified from Accumulated other comprehensive income (loss) to income tax expense.


18



Note 9.
Long-Term Obligations
Long-Term Obligations consist of the following (in thousands):
 
March 31,
 
December 31,
 
2017
 
2016
Senior secured credit agreement:
 
 
 
Term loans payable
$
723,390

 
$
732,684

Revolving credit facilities
1,018,181

 
1,358,220

Senior notes
600,000

 
600,000

Euro notes
532,600

 
525,850

Receivables securitization facility
99,850

 
100,000

Notes payable through October 2025 at weighted average interest rates of 2.3% and 2.1%, respectively
10,014

 
11,808

Other long-term debt at weighted average interest rates of 2.0% and 2.4%, respectively
64,148

 
37,125

Total debt
3,048,183

 
3,365,687

Less: long-term debt issuance costs
(20,604
)
 
(21,611
)
Less: current debt issuance costs
(2,314
)
 
(2,305
)
Total debt, net of issuance costs
3,025,265

 
3,341,771

Less: current maturities, net of debt issuance costs
(91,988
)
 
(66,109
)
Long term debt, net of debt issuance costs
$
2,933,277

 
$
3,275,662

Senior Secured Credit Agreement
On January 29, 2016, LKQ Corporation, LKQ Delaware LLP, and certain other subsidiaries (collectively, the "Borrowers") entered into the Fourth Amended and Restated Credit Agreement ("Credit Agreement"), which amended the Company’s Third Amended and Restated Credit Agreement by modifying certain terms to (1) extend the maturity date by approximately two years to January 29, 2021; (2) increase the total availability under the credit agreement from $2.3 billion to $3.2 billion (composed of $2.45 billion in the revolving credit facility's multicurrency component; and $750 million of term loans, which consist of term loans of approximately $500 million and €230 million); (3) increase our ability to incur additional indebtedness; and (4) make other immaterial or clarifying modifications and amendments to the terms of the Third Amended and Restated Credit Agreement. The additional term loan borrowing was used to repay outstanding revolver borrowings and the amount outstanding under our receivables securitization facility, and to pay fees and expenses relating to the amendment and restatement. The remaining additional term loan borrowing was used for general corporate purposes.
On December 14, 2016, LKQ Corporation entered into Amendment No. 1 to the Fourth Amended and Restated Credit Agreement under which the €230 million term loan was prepaid in full using proceeds from borrowings on the multicurrency revolving credit facility. Simultaneously, LKQ Corporation borrowed incremental U.S. dollar ("USD") term loans under the Credit Agreement, which were used to repay outstanding borrowings on the USD revolving credit facility. LKQ Corporation borrowed additional USD amounts on the revolving credit facility and entered into a cross currency swap transaction to exchange the borrowed USD for euro and transferred these amounts to LKQ Netherlands B.V. as an intercompany loan, which LKQ Netherlands B.V. used to repay the multicurrency revolving credit facility borrowings. These transactions had the effect of replacing the euro term loan with a USD term loan. Refer to Note 10, "Derivative Instruments and Hedging Activities" for additional information related to our cross currency swaps.
Amounts under the revolving credit facility are due and payable upon maturity of the Fourth Amended and Restated Credit Agreement on January 29, 2021. Amounts under the initial and additional term loan borrowings were due and payable in quarterly installments equal to 0.625% of the original principal amount on each of June 30, September 30, and December 31, 2016, and are due and payable in quarterly installments thereafter equal to 1.25% of the original principal amount beginning on March 31, 2017, with the remaining balance due and payable on the maturity date of the Fourth Amended and Restated 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.

19



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 10, "Derivative Instruments and Hedging Activities," the weighted average interest rate on borrowings outstanding under the Credit Agreement at March 31, 2017 and December 31, 2016 was 2.0%. 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, $37.2 million was classified as current maturities at both March 31, 2017 and December 31, 2016. As of March 31, 2017, there were letters of credit outstanding in the aggregate amount of $72.2 million. The amounts available under the revolving credit facilities are reduced by the amounts outstanding under letters of credit, and thus availability under the revolving credit facilities at March 31, 2017 was $1.4 billion.
Related to the execution of the Credit Agreement in January 2016, we incurred $6.1 million of fees, of which $5.0 million were capitalized as an offset to Long-Term Obligations and are amortized over the term of the agreement. The remaining $1.1 million of fees, together with $1.8 million of capitalized debt issuance costs related to our Third Amended and Restated Credit Agreement, were expensed during the three months ended March 31, 2016 as a loss on debt extinguishment.
Senior Notes
In April 2014, LKQ Corporation completed an offer to exchange $600 million aggregate principal amount of 4.75% Senior Notes due 2023 (the "U.S. Notes") for notes previously issued through a private placement. The U.S. Notes are governed by the 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 U.S. Notes are substantially identical to those previously issued through the private placement, except the U.S. Notes are registered under the Securities Act of 1933.
The U.S. 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 U.S. 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 U.S. Notes are fully and unconditionally guaranteed, jointly and severally, by the Guarantors.
The U.S. Notes and the 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 are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the U.S. Notes to the extent of the assets of those subsidiaries.
Repayment of Rhiag Acquired Debt and Debt Related Liabilities
On March 24, 2016, LKQ Netherlands B.V., a wholly-owned subsidiary of ours, borrowed €508 million under our multi-currency revolving credit facility to repay the Rhiag acquired debt and debt related liabilities. The borrowed funds were passed through an intercompany note to Rhiag and then were used to pay (i) $519.6 million (€465.0 million) for the principal of Rhiag senior note debt assumed with the acquisition, (ii) accrued interest of $8.0 million (€7.1 million) on the notes, (iii) the call premium of $23.8 million (€21.2 million) associated with early redemption of the notes and (iv) $4.9 million (€4.4 million) to terminate Rhiag’s outstanding interest rate swap related to the floating portion of the notes. The call premium is recorded as a loss on debt extinguishment in the Unaudited Condensed Consolidated Statements of Income.
Euro Notes
On April 14, 2016, LKQ Italia Bondco S.p.A. (the “Issuer”), an indirect, wholly-owned subsidiary of LKQ Corporation, completed an offering of €500 million aggregate principal amount of senior notes due April 1, 2024 (the “Euro Notes”) 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 are governed by the Indenture dated as of April 14, 2016 (the “Indenture”) among the Issuer, LKQ Corporation and certain of our subsidiaries (the “Euro Notes Subsidiaries”), the trustee, and the paying agent, transfer agent, and registrar.

20



The Euro Notes 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 is payable in arrears on April 1 and October 1 of each year, beginning on October 1, 2016. The Euro Notes are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes Subsidiaries (the "Euro Notes Guarantors").
The Euro Notes and the guarantees are, respectively, the Issuer’s and each Euro Notes Guarantor’s senior unsecured obligations and are subordinated to all of the Issuer's and the Euro Notes Guarantors’ existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes to the extent of the assets of those subsidiaries. The Euro Notes have been listed on the ExtraMOT, Professional Segment of the Borsa Italia S.p.A. securities exchange as well as the Global Exchange Market of the Irish Stock Exchange.
Related to the execution of the Euro Notes in April 2016, we incurred $10.3 million of fees which were capitalized as an offset to Long-Term Obligations and are amortized over the term of the offering.
Receivables Securitization Facility
On November 29, 2016, we 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 November 8, 2019; (ii) increase the maximum amount available to $100 million; and (iii) make other clarifying and updating changes. Under the facility, LKQ sells an ownership interest in certain receivables, related collections and security interests to BTMU for the benefit of conduit investors and/or financial institutions for cash proceeds. Upon payment of the receivables by customers, rather than remitting to BTMU the amounts collected, LKQ retains such collections as proceeds for the sale of new receivables generated by certain of the ongoing operations of the Company.
The sale of the ownership interest in the receivables is accounted for as a secured borrowing in our 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 March 31, 2017 and December 31, 2016, $141.9 million and $140.3 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 March 31, 2017, the interest rate under the receivables facility was based on commercial paper rates and was 1.8%. The outstanding balances of $99.9 million and $100.0 million as of March 31, 2017 and December 31, 2016, 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 10.
Derivative Instruments and Hedging Activities
We are exposed to market risks, including the effect of changes in interest rates, foreign currency exchange rates and commodity prices. Under our current policies, we use derivatives to manage our exposure to variable interest rates on our senior secured debt and changing foreign exchange rates for certain foreign currency denominated transactions. We do not hold or issue derivatives for trading purposes.
Cash Flow Hedges
We hold interest rate swap agreements to hedge a portion of the variable interest rate risk on our variable rate borrowings under our Credit Agreement, with the objective of minimizing the impact of interest rate fluctuations and stabilizing cash flows. Under the terms of the interest rate swap agreements, we pay the fixed interest rate and receive payment at a variable rate of interest based on LIBOR for the respective currency of each interest rate swap agreement’s notional amount. The effective portion of changes in the fair value of the interest rate swap agreements is recorded in Accumulated Other Comprehensive Income (Loss) and is reclassified to interest expense when the underlying interest payment has an impact on earnings. The ineffective portion of changes in the fair value of the interest rate swap agreements is reported in interest expense. Our interest rate swap contracts have maturity dates ranging from January to June 2021.

21



From time to time, we may hold foreign currency forward contracts related to certain foreign currency denominated intercompany transactions, with the objective of minimizing the impact of fluctuating exchange rates on these future cash flows. Under the terms of the foreign currency forward contracts, we will sell the foreign currency in exchange for U.S. dollars at a fixed rate on the maturity dates of the contracts. The effective portion of the changes in fair value of the foreign currency forward contracts is recorded in Accumulated other comprehensive income (loss) and reclassified to other income (expense) 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 $422.4 million (€400 million). The notional amount steps down by €15.0 million annually through 2020 with the remainder maturing in January 2021. These cross currency swaps contain an interest rate swap component and a foreign currency forward contract component that, combined with related intercompany financing arrangements, effectively convert variable rate U.S. dollar-denominated borrowings into fixed rate euro-denominated borrowings. The swaps are intended to minimize the impact of fluctuating exchange rates and interest rates on the cash flows resulting from the related intercompany financing arrangements. The effective portion of the changes in the fair value of the derivative instruments is recorded in Accumulated Other Comprehensive Income (Loss) and is reclassified to interest expense and other income (expense) when the underlying transactions have an impact on earnings.
The following table summarizes the notional amounts and fair values of our designated cash flow hedges as of March 31, 2017 and December 31, 2016 (in thousands):
 
 
Notional Amount
 
Fair Value at March 31, 2017 (USD)
 
Fair Value at December 31, 2016 (USD)
 
 
March 31, 2017
 
December 31, 2016
 
Other Assets
 
Other Noncurrent Liabilities
 
Other Assets
 
Other Noncurrent Liabilities
Interest rate swap agreements
 
 
 
 
 
 
 
 
USD denominated
 
$
590,000

 
$
590,000

 
$
17,489

 
$

 
$
16,421

 
$

Cross currency swap agreements
 
 
 
 
 
 
 
 
USD/euro
 
$
418,442

 
$
422,408

 
2,524

 
5,388

 
1,486

 
3,128

 Total cash flow hedges
 
$
20,013

 
$
5,388

 
$
17,907

 
$
3,128

 
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 March 31, 2017 or December 31, 2016.
The activity related to our cash flow hedges is included in Note 8, "Accumulated Other Comprehensive Income (Loss)." Ineffectiveness related to our cash flow hedges was immaterial to our results of operations during the three months ended March 31, 2017 and 2016. We do not expect future ineffectiveness related to our cash flow hedges to have a material effect on our results of operations.
As of March 31, 2017, we estimate that $0.1 million of derivative gains (net of tax) included in Accumulated other comprehensive income (loss) will be reclassified into our Unaudited Condensed Consolidated Statements of Income within the next 12 months.
Other Derivative Instruments
We hold other short-term derivative instruments, including foreign currency forward contracts, to manage our exposure to variability related to inventory purchases and intercompany financing transactions denominated in a non-functional currency. We have elected not to apply hedge accounting for these transactions, and therefore the contracts are adjusted to fair value through our results of operations as of each balance sheet date, which could result in volatility in our earnings. The notional amount and fair value of these contracts at March 31, 2017 and December 31, 2016, along with the effect on our results of operations during each of the three month periods ended March 31, 2017 and 2016, were immaterial.

Note 11.
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 three months ended March 31, 2017, there were no significant changes in valuation techniques or inputs related to the financial assets or

22



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 March 31, 2017 and December 31, 2016 (in thousands):
 
Balance as of March 31, 2017
 
Fair Value Measurements as of March 31, 2017
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Cash surrender value of life insurance
$
38,428

 
$

 
$
38,428

 
$

Interest rate swaps
20,013

 

 
20,013

 

Total Assets
$
58,441

 
$

 
$
58,441

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liabilities
$
11,242

 
$

 
$

 
$
11,242

Deferred compensation liabilities
40,131

 

 
40,131

 

Foreign currency forward contracts
5,388

 

 
5,388

 

Total Liabilities
$
56,761

 
$

 
$
45,519

 
$
11,242

    
 
Balance as of December 31, 2016
 
Fair Value Measurements as of December 31, 2016
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Cash surrender value of life insurance
$
36,131

 
$

 
$
36,131

 
$

Interest rate swaps
17,907

 
 
 
17,907

 
 
Total Assets
$
54,038

 
$

 
$
54,038

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liabilities
$
3,162

 
$

 
$

 
$
3,162

Deferred compensation liabilities
36,865

 

 
36,865

 

Foreign currency forward contracts
3,128

 

 
3,128

 

Total Liabilities
$
43,155

 
$

 
$
39,993

 
$
3,162

The cash surrender value of life insurance is included in Other 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 foreign currency forward contracts is presented in Note 10, "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 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.

23



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 March 31, 2017 and December 31, 2016, the fair value of our credit agreement borrowings reasonably approximated the carrying value of $1.7 billion and $2.1 billion, respectively. In addition, based on market conditions, the fair values of the outstanding borrowings under the receivables facility reasonably approximated the carrying value of $99.9 million and $100.0 million at March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017 and December 31, 2016, the fair values of the U.S. Notes were approximately $595.8 million and $599.5 million, respectively, compared to a carrying value of $600.0 million. As of March 31, 2017 and December 31, 2016, the fair values of the Euro Notes were approximately $562.8 million and $560.6 million compared to carrying values of $532.6 million and $525.9 million, respectively.
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 March 31, 2017 to assume these obligations. The fair value of our U.S. 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. The fair value of our Euro Notes is determined based upon observable market inputs including quoted market prices in a market that is not active, and therefore is classified as Level 2 within the fair value hierarchy.

Note 12.
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 March 31, 2017 are as follows (in thousands):
Nine months ending December 31, 2017
$
158,837

Years ending December 31:
 
2018
182,944

2019
151,442

2020
122,188

2021
92,010

2022
75,622

Thereafter
457,967

Future Minimum Lease Payments
$
1,241,010

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 13.
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.    

24



Our effective income tax rate for the three months ended March 31, 2017 was 33.9%, compared with 32.1% for the comparable prior year period. The effective tax rate for the three months ended March 31, 2017 and 2016 reflects the impact of favorable discrete items related to excess tax benefits from stock-based payments in the amount of $3.3 million and $4.4 million, respectively. The increase in our effective tax rate for the three months ended March 31, 2017 compared to the prior year period also reflects our expected geographic distribution of income, with a slightly larger proportion of our pre-tax income expected to be earned in the U.S., which has a higher tax rate than our foreign operations.

Note 14.
Segment and Geographic Information
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. 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 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 (1)
 
Europe
 
Specialty (1)
 
Eliminations
 
Consolidated
Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Third Party
$
1,208,047

 
$
820,897

 
$
313,899

 
$

 
$
2,342,843

Intersegment
193

 

 
1,035

 
(1,228
)
 

Total segment revenue
$
1,208,240

 
$
820,897

 
$
314,934

 
$
(1,228
)
 
$
2,342,843

Segment EBITDA
$
176,135

 
$
78,694

 
$
35,441

 
$

 
$
290,270

Depreciation and amortization (2)
20,378

 
24,751

 
5,475

 

 
50,604

Three Months Ended March 31, 2016
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Third Party
$
1,080,606

 
$
546,751

 
$
294,119

 
$

 
$
1,921,476

Intersegment
214

 
10

 
951

 
(1,175
)
 

Total segment revenue
$
1,080,820

 
$
546,761

 
$
295,070

 
$
(1,175
)
 
$
1,921,476

Segment EBITDA
$
145,691

 
$
57,498

 
$
33,422

 
$

 
$
236,611

Depreciation and amortization (2)
17,390

 
10,308

 
5,468

 

 
33,166

(1)
In the first quarter of 2017, we realigned a portion of our North America operations under our Specialty segment. Prior year results have been recast to reflect the shift in reporting structure in order to present segment results on a comparable basis.
(2)
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 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, change in fair value of contingent consideration liabilities, other acquisition related gains and losses and equity in earnings (loss) of unconsolidated subsidiaries. EBITDA, which is the basis for Segment EBITDA, is calculated as net income excluding discontinued operations, depreciation, amortization, interest (which includes loss on debt extinguishment) and income tax expense.
The table below provides a reconciliation of Net Income to Segment EBITDA (in thousands):

25



 
Three Months Ended
 
March 31,
 
2017
 
2016
Net income
$
136,278

 
$
112,171

Subtract:
 
 
 
Loss from discontinued operations, net of tax
(4,531
)
 

Income from continuing operations
140,809

 
112,171

Add:
 
 
 
Depreciation and amortization
48,656

 
31,688

Depreciation and amortization - cost of goods sold
1,948

 
1,478

Interest expense, net
23,988

 
14,592

Loss on debt extinguishment

 
26,650

Provision for income taxes
72,155

 
53,128

EBITDA
287,556

 
239,707

Subtract:
 
 
 
Equity in earnings (loss) of unconsolidated subsidiaries
214

 
(362
)
Gains on foreign exchange contracts - acquisition related (1)

 
18,342

Add:
 
 
 
Restructuring and acquisition related expenses (2)
2,928

 
14,811

Change in fair value of contingent consideration liabilities

 
73

Segment EBITDA
$
290,270

 
$
236,611

(1)
Reflects gains on foreign currency forwards used to fix the euro purchase price of Rhiag. See Note 2, "Business Combinations," for further information.
(2)
See Note 5, "Restructuring and Acquisition Related Expenses," for further information.
         
The following table presents capital expenditures by reportable segment (in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Capital Expenditures
 
 
 
North America
$
16,760

 
$
22,783

Europe
20,458

 
19,107

Specialty
3,582

 
8,503

Discontinued operations
3,598

 

Total capital expenditures
$
44,398

 
$
50,393


26



The following table presents assets by reportable segment (in thousands):
 
March 31,
 
December 31,
 
2017
 
2016
Receivables, net
 
 
 
North America
$
382,922

 
$
351,681

Europe
473,834

 
443,281

Specialty
116,914

 
65,587

Total receivables, net
973,670

 
860,549

Inventories
 
 
 
North America
945,454

 
915,244

Europe
740,209

 
718,729

Specialty
292,802

 
301,264

Total inventories
1,978,465

 
1,935,237

Property and Equipment, net
 
 
 
North America
502,582

 
505,925

Europe
247,720

 
247,910

Specialty
58,906

 
57,741

Total property and equipment, net
809,208

 
811,576

Equity Method Investments
 
 
 
North America
336

 
336

Europe
184,926

 
183,131

Total equity method investments
185,262

 
183,467

Other unallocated assets
4,175,641

 
4,512,370

Total assets
$
8,122,246

 
$
8,303,199

We report net receivables, inventories, and net property and equipment 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, prepaid and other current and noncurrent assets, goodwill, intangibles, assets of discontinued operations and income taxes.
The majority of our operations are conducted in the U.S. Our European operations are located in the U.K., the Netherlands, Belgium, France, Italy, Czech Republic, Switzerland, Hungary, Romania, Ukraine, Bulgaria, Slovakia, Spain, Sweden, and Norway. Our operations in other countries include recycled and aftermarket 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
 
March 31,
 
2017
 
2016
Revenue
 
 
 
United States
$
1,417,040

 
$
1,284,967

United Kingdom
382,652

 
349,676

Other countries
543,151

 
286,833

Total revenue
$
2,342,843

 
$
1,921,476


27




The following table sets forth our tangible long-lived assets by geographic area (in thousands):
 
March 31,
 
December 31,
 
2017
 
2016
Long-lived Assets
 
 
 
United States
$
529,589

 
$
531,425

United Kingdom
163,090

 
159,689

Other countries
116,529

 
120,462

Total long-lived assets
$
809,208

 
$
811,576


The following table sets forth our revenue by product category (in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Aftermarket, other new and refurbished products
$
1,758,062

 
$
1,387,736

Recycled, remanufactured and related products and services
454,879

 
430,589

Other
129,902

 
103,151

Total revenue
$
2,342,843

 
$
1,921,476

Our North America reportable segment generates revenue from all of our product categories, while our Europe and Specialty segments generate revenue primarily from the sale of aftermarket products. Revenue from other sources includes scrap sales, bulk sales to mechanical remanufacturers (including cores) and sales of aluminum ingots and sows from our furnace operations.

Note 15.
Condensed Consolidating Financial Information
LKQ Corporation (the "Parent") issued, and the Guarantors have fully and unconditionally guaranteed, jointly and severally, the U.S. Notes 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; (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 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; (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; and (iv) upon legal defeasance, covenant defeasance or satisfaction and discharge of the Indenture, as defined in the 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. 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.





28



LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidating Statements of Income
(In thousands)
 
For the Three Months Ended March 31, 2017
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$
1,453,516

 
$
929,971

 
$
(40,644
)
 
$
2,342,843

Cost of goods sold

 
863,375

 
590,019

 
(40,644
)
 
1,412,750

Gross margin

 
590,141

 
339,952

 

 
930,093

Facility and warehouse expenses

 
127,803

 
61,977

 

 
189,780

Distribution expenses

 
120,430

 
65,380

 

 
185,810

Selling, general and administrative expenses
9,183

 
137,295

 
120,749

 

 
267,227

Restructuring and acquisition related expenses

 
1,883

 
1,045

 

 
2,928

Depreciation and amortization
30

 
23,481

 
25,145

 

 
48,656

Operating (loss) income
(9,213
)
 
179,249

 
65,656

 

 
235,692

Other expense (income):
 
 
 
 
 
 
 
 
 
Interest expense, net
16,180

 
198

 
7,610

 

 
23,988

Intercompany interest (income) expense, net
(5,672
)
 
1,019

 
4,653

 

 

Other expense (income), net
291

 
(169
)
 
(1,168
)
 

 
(1,046
)
Total other expense, net
10,799