10-Q 1 lkq-20180331_10q.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, 2018
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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated 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 27, 2018, the registrant had issued and outstanding an aggregate of 309,710,577 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,
 
2018
 
2017
Revenue
$
2,720,764

 
$
2,342,843

Cost of goods sold
1,666,793

 
1,412,750

Gross margin
1,053,971

 
930,093

Selling, general and administrative expenses (1)
766,891

 
642,817

Restructuring and acquisition related expenses
4,054

 
2,928

Depreciation and amortization
56,458

 
48,656

Operating income
226,568

 
235,692

Other expense (income):
 
 
 
Interest expense, net
28,515

 
23,988

Other income, net
(2,882
)
 
(1,046
)
Total other expense, net
25,633

 
22,942

Income from continuing operations before provision for income taxes
200,935

 
212,750

Provision for income taxes
49,584

 
72,155

Equity in earnings of unconsolidated subsidiaries
1,412

 
214

Income from continuing operations
152,763

 
140,809

Net loss from discontinued operations

 
(4,531
)
Net income
152,763

 
136,278

Less: net loss attributable to noncontrolling interest
(197
)
 

Net income attributable to LKQ stockholders
$
152,960

 
$
136,278

 
 
 
 
Basic earnings per share: (2)
 
 
 
Income from continuing operations
$
0.49

 
$
0.46

Net loss from discontinued operations

 
(0.01
)
Net income
0.49

 
0.44

Less: net loss attributable to noncontrolling interest
(0.00
)
 

Net income attributable to LKQ stockholders
$
0.49

 
$
0.44

 
 
 
 
Diluted earnings per share: (2)
 
 
 
Income from continuing operations
$
0.49

 
$
0.45

Net loss from discontinued operations

 
(0.01
)
Net income
0.49

 
0.44

Less: net loss attributable to noncontrolling interest
(0.00
)
 

Net income attributable to LKQ stockholders
$
0.49

 
$
0.44

(1) Selling, general and administrative expenses contain facility and warehouses expenses and distribution expenses that
were previously shown separately.
(2) The sum of the individual earnings per share amounts may not equal the total due to rounding.






The accompanying notes are an integral part of the condensed consolidated financial statements.
2




LKQ CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income
(In thousands)
 
Three Months Ended
 
March 31,
 
2018
 
2017
Net income
$
152,763

 
$
136,278

Less: net loss attributable to noncontrolling interest
(197
)
 

Net income attributable to LKQ stockholders
152,960

 
136,278

 
 
 
 
Other comprehensive income (loss):
 
 
 
Foreign currency translation, net of tax
48,485

 
21,579

Net change in unrealized gains/losses on cash flow hedges, net of tax
3,254

 
3,163

Net change in unrealized gains/losses on pension plans, net of tax
(621
)
 
(3,041
)
Net change in other comprehensive loss from unconsolidated subsidiaries
(605
)
 
(162
)
Other comprehensive income
50,513

 
21,539

 
 
 
 
Comprehensive income
203,276

 
157,817

Less: comprehensive loss attributable to noncontrolling interest
(197
)
 

Comprehensive income attributable to LKQ stockholders
$
203,473

 
$
157,817


The accompanying notes are an integral part of the condensed 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,
 
2018
 
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
245,679

 
$
279,766

Receivables, net
1,211,788

 
1,027,106

Inventories
2,401,309

 
2,380,783

Prepaid expenses and other current assets
180,367

 
134,479

Total current assets
4,039,143

 
3,822,134

Property, plant and equipment, net
929,756

 
913,089

Intangible assets:
 
 
 
Goodwill
3,572,198

 
3,536,511

Other intangibles, net
740,804

 
743,769

Equity method investments
208,210

 
208,404

Other assets
146,067

 
142,965

Total assets
$
9,636,178

 
$
9,366,872

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
812,661

 
$
788,613

Accrued expenses:
 
 
 
Accrued payroll-related liabilities
112,140

 
143,424

Other accrued expenses
267,364

 
218,600

Refund liability
99,179

 

Other current liabilities
41,167

 
45,727

Current portion of long-term obligations
142,277

 
126,360

Total current liabilities
1,474,788

 
1,322,724

Long-term obligations, excluding current portion
3,170,788

 
3,277,620

Deferred income taxes
242,226

 
252,359

Other noncurrent liabilities
329,395

 
307,516

Commitments and contingencies

 


Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 309,630,976 and 309,126,386 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively
3,096

 
3,091

Additional paid-in capital
1,146,391

 
1,141,451

Retained earnings
3,271,718

 
3,124,103

Accumulated other comprehensive loss
(14,618
)
 
(70,476
)
Total Company stockholders' equity
4,406,587

 
4,198,169

Noncontrolling interest
12,394

 
8,484

Total stockholders' equity
4,418,981

 
4,206,653

Total liabilities and stockholders’ equity
$
9,636,178

 
$
9,366,872





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




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
 
Three Months Ended
 
March 31,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
152,763

 
$
136,278

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
61,066

 
50,604

Stock-based compensation expense
5,982

 
7,285

Loss on sale of business

 
8,580

Other
(3,134
)
 
1,343

Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:
 
 
 
Receivables, net
(130,520
)
 
(108,893
)
Inventories
5,016

 
(745
)
Prepaid income taxes/income taxes payable
37,362

 
61,064

Accounts payable
23,924

 
24,449

Other operating assets and liabilities
(7,296
)
 
(7,672
)
Net cash provided by operating activities
145,163

 
172,293

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment
(62,189
)
 
(44,398
)
Acquisitions, net of cash acquired
(2,966
)
 
(77,056
)
Proceeds from disposals of business/investment

 
301,297

Other investing activities, net
534

 
1,314

Net cash (used in) provided by investing activities
(64,621
)
 
181,157

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from exercise of stock options
2,255

 
2,464

Taxes paid related to net share settlements of stock-based compensation awards
(3,292
)
 
(3,644
)
Debt issuance costs
(724
)
 

Borrowings under revolving credit facilities
201,669

 
45,239

Repayments under revolving credit facilities
(321,525
)
 
(389,313
)
Repayments under term loans
(4,405
)
 
(9,295
)
Repayments under receivables securitization facility

 
(150
)
Borrowings of other debt, net
4,409

 
23,313

Other financing activities, net
4,107

 
5,000

Net cash used in financing activities
(117,506
)
 
(326,386
)
Effect of exchange rate changes on cash and cash equivalents
2,877

 
3,034

Net (decrease) increase in cash and cash equivalents
(34,087
)
 
30,098

Cash and cash equivalents of continuing operations, beginning of period
279,766

 
227,400

Add: Cash and cash equivalents of discontinued operations, beginning of period

 
7,116

Cash and cash equivalents of continuing and discontinued operations, beginning of period
279,766

 
234,516

Cash and cash equivalents, end of period
$
245,679

 
$
264,614

Supplemental disclosure of cash paid for:
 
 
 
Income taxes, net of refunds
$
15,464

 
$
13,746

Interest
13,975

 
10,965

Supplemental disclosure of noncash investing and financing activities:
 
 
 
Noncash property, plant and equipment additions
$
4,199

 
$
2,936

Contingent consideration liabilities
34

 
10,969

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

 
5,848


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




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Stockholders’ Equity
(In thousands)
 
 
 
 
 
LKQ Stockholders
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive (Loss) Income
 
Noncontrolling Interest
 
Total Stockholders' Equity
 
Shares
Issued
 
Amount
 
BALANCE, January 1, 2018
309,127

 
$
3,091

 
$
1,141,451

 
$
3,124,103

 
$
(70,476
)
 
$
8,484

 
$
4,206,653

Net income

 

 

 
152,960

 

 
(197
)
 
152,763

Other comprehensive income

 

 

 

 
50,513

 

 
50,513

Vesting of restricted stock units, net of shares withheld for employee tax
300

 
3

 
(2,399
)
 

 

 

 
(2,396
)
Stock-based compensation expense

 

 
5,982

 

 

 

 
5,982

Exercise of stock options
226

 
2

 
2,253

 

 

 

 
2,255

Shares withheld for net share settlement of stock option awards
(22
)
 

 
(896
)
 

 

 

 
(896
)
Adoption of ASU 2018-02 (see Note 4)

 

 

 
(5,345
)
 
5,345

 

 

Capital contributions from noncontrolling interest shareholder

 

 

 

 

 
4,107

 
4,107

BALANCE, March 31, 2018
309,631

 
$
3,096

 
$
1,146,391

 
$
3,271,718

 
$
(14,618
)
 
$
12,394

 
$
4,418,981


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




LKQ CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1.
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements represent the consolidation of LKQ Corporation, a Delaware corporation, and its subsidiaries. LKQ Corporation is a holding company and all operations are conducted by subsidiaries. When the terms "LKQ," "the Company," "we," "us," or "our" are used in this document, those terms refer to LKQ Corporation and its consolidated subsidiaries.
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to interim financial statements. Accordingly, certain information related to our significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted. These unaudited condensed consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normally recurring adjustments) necessary to fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Operating results for interim periods are not necessarily indicative of the results that can be expected for any subsequent interim period or for a full year. These interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 28, 2018 ("2017 Form 10-K").

Note 2. Business Combinations
During the three months ended March 31, 2018, we completed one acquisition of a wholesale business in North America. This acquisition was not material to our results of operations or financial position as of and for the three months ended March 31, 2018.
During the year ended December 31, 2017, we completed 26 acquisitions including 6 wholesale businesses in North America, 16 wholesale businesses in Europe and 4 Specialty businesses. Our acquisitions in Europe included the acquisition of four aftermarket parts distribution businesses in Belgium in July 2017. Our acquisitions in Specialty included the acquisition of the aftermarket business of Warn Industries, Inc. ("Warn"), a leading designer, manufacturer and marketer of high performance vehicle equipment and accessories, in November 2017.
Total acquisition date fair value of the consideration for our 2017 acquisitions was $542 million, composed of $510 million of cash paid (net of cash acquired), $6 million for the estimated value of contingent payments to former owners (with maximum potential payments totaling $19 million), $5 million of other purchase price obligations (non-interest bearing) and $20 million of notes payable. We typically fund our acquisitions using borrowings under our credit facilities or other financing arrangements. During the year ended December 31, 2017, we recorded $307 million of goodwill related to these acquisitions, of which we expect $21 million to be deductible for income tax purposes.
On December 10, 2017, we entered into an agreement to acquire Stahlgruber GmbH ("Stahlgruber"), a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories with operations in Germany, Austria, Czech Republic, Italy, Slovenia, and Croatia with further sales to Switzerland. This acquisition will expand LKQ's geographic presence in continental Europe and serve as an additional strategic hub for our European operations. In addition, we believe this acquisition will allow for continued improvement in procurement, logistics and infrastructure optimization. The enterprise value for the pending Stahlgruber acquisition is €1.5 billion, which will be financed with the proceeds from €1.0 billion of senior notes, the direct issuance to Stahlgruber's owner of 8,055,569 newly issued shares of LKQ common stock, and borrowings under our existing revolving credit facility. On May 3, 2018, the European Commission cleared the proposed acquisition for the entire European Union, except with respect to the wholesale automotive parts business in the Czech Republic. The acquisition of the Czech Republic wholesale business has been referred to the Czech competition authority for review. We anticipate that the closing of the transaction with respect to Stahlgruber's operations outside of the Czech Republic will occur during the second quarter of 2018. The Czech Republic wholesale business represents an immaterial portion of Stahlgruber's revenue and profitability.
Our acquisitions are accounted for under the purchase method of accounting and are included in our consolidated financial statements from the dates of acquisition. The purchase prices were allocated to the net assets acquired based upon estimated fair values at the dates of acquisition. The purchase price allocations for the acquisitions made during the three months ended March 31, 2018 and the last nine months of the year ended December 31, 2017 are preliminary as we are in the process of determining the following: 1) valuation amounts for certain receivables, inventories and fixed assets acquired; 2) valuation amounts for certain intangible assets acquired; 3) the acquisition date fair value of certain liabilities assumed; and

7



4) the final estimation of the tax basis of the entities acquired. We have recorded preliminary estimates for certain of the items noted above and will record adjustments, if any, to the preliminary amounts upon finalization of the valuations. During the first quarter of 2018, the measurement period adjustments recorded for acquisitions completed in prior periods were not material.
The purchase price allocations for the acquisitions completed during the year ended December 31, 2017 are as follows (in thousands):
 
Year Ended
 
December, 31, 2017
 
All
Acquisitions
 (1)
Receivables
$
73,782

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

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

Goodwill
314,817

Other intangibles
181,216

Other assets
3,257

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

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

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

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

8



business that provide additional value to the combined entity. In many cases, acquiring companies with these characteristics will result in purchase prices that include a significant amount of goodwill.
The following pro forma summary presents the effect of the businesses acquired during the three months ended March 31, 2018 as though the businesses had been acquired as of January 1, 2017, and the businesses acquired during the year ended December 31, 2017 as though they had been acquired as of January 1, 2016. The pro forma adjustments are based upon unaudited financial information of the acquired entities (in thousands, except per share data):
 
Three Months Ended
 
March 31,
 
2018
 
2017
Revenue, as reported
$
2,720,764

 
$
2,342,843

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

 
139,216

Pro forma revenue
$
2,720,790

 
$
2,482,059

 
 
 
 
Income from continuing operations, as reported
$
152,763

 
$
140,809

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

 
7,470

Acquisition related expenses, net of tax (1)
623

 
1,243

Pro forma income from continuing operations
$
153,386

 
$
149,522

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

 
$
0.46

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

 
0.02

Acquisition related expenses, net of tax (1)
0.00

 
0.00

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

 
$
0.49

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

 
$
0.45

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

 
0.02

Acquisition related expenses, net of tax (1)
0.00

 
0.00

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

 
$
0.48

(1)
Includes expenses related to acquisitions closed in the period and excludes expenses for acquisitions not yet completed.
(2)
The sum of the individual earnings per share amounts may not equal the total due to rounding.
Unaudited pro forma supplemental information is based upon accounting estimates and judgments that we believe are reasonable. The unaudited pro forma supplemental information includes the effect of purchase accounting adjustments, such as the adjustment of inventory acquired to fair value, adjustments to depreciation on acquired property, plant and equipment, adjustments to rent expense for above or below market leases, adjustments to amortization on acquired intangible assets, adjustments to interest expense, and the related tax effects. The pro forma impact of our acquisitions also reflects the elimination of acquisition related expenses, net of tax. Refer to Note 6, "Restructuring and Acquisition Related Expenses," for further information regarding our acquisition related expenses. These pro forma results are not necessarily indicative of what would have occurred if the acquisitions had been in effect for the periods presented or of future results.

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 million, including cash received of $316 million, net of cash disposed of $15 million. Related to this transaction, the remaining portion of the Glass operating segment was combined with our Wholesale - North America operating segment, which is part of our North America reportable segment, in the first quarter of 2017. See Note 15, "Segment and Geographic Information" for further information regarding our segments.

9



In connection with the Stock and Asset Purchase Agreement, the Company and Vitro entered into a twelve-month Transition Services Agreement commencing on the transaction date with two six-month renewal periods, a three-year Purchase and Supply Agreement, and an Intellectual Property Agreement.
The following table summarizes the operating results of the Company’s discontinued operations related to the sale described above for the three months ended March 31, 2017, as presented in Net loss from discontinued operations on the Unaudited Condensed Consolidated Statements of Income (in thousands):
 
Three Months Ended
 
March 31, 2017
Revenue
$
111,130

Cost of goods sold
100,084

Selling, general and administrative expenses
8,369

Operating income
2,677

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

Income from discontinued operations before taxes
3,881

Provision for income taxes
3,598

Equity in loss of unconsolidated subsidiaries
(534
)
Loss from discontinued operations, net of tax
(251
)
Loss on sale of discontinued operations, net of tax (2)
(4,280
)
Net loss from discontinued operations
$
(4,531
)
(1) The Company elected to allocate interest expense to discontinued operations based on the expected debt to be repaid. Under this approach, allocated interest from January 1, 2017 through the date of sale was $2 million. This expense was offset by foreign currency gains.
(2) In the first quarter of 2017, upon closing of the sale and write-off of the net assets of the glass manufacturing business, we recorded a pre-tax loss on sale of $9 million, and a $4 million tax benefit. The incremental loss primarily reflects a $6 million payable for intercompany sales from the glass manufacturing business to the aftermarket automotive glass distribution business incurred prior to closing, which was paid by LKQ during the second quarter of 2017, and capital expenditures in 2017 that were not reimbursed by the buyer.
The glass manufacturing business had $4 million of operating cash outflows, $4 million of investing cash outflows mainly consisting of capital expenditures, and $15 million of financing cash inflows made up of parent financing for the period from January 1, 2017 through March 1, 2017.
Pursuant to the Purchase and Supply Agreement, our aftermarket automotive glass distribution business will source various products from Vitro's glass manufacturing business annually for a three-year period beginning on March 1, 2017. Between January 1, 2017 and the sale date of March 1, 2017, intercompany sales between the glass manufacturing business and the continuing aftermarket automotive glass distribution business of PGW, which were eliminated in consolidation, were $8 million. All purchases from Vitro, including those outside of the Purchase and Supply Agreement, for the three months ended March 31, 2018 and for the period between the sale date of March 1, 2017 and March 31, 2017, were $10 million and $4 million, respectively.

Note 4. Financial Statement Information
Allowance for Doubtful Accounts
We have a reserve for uncollectible accounts, which was approximately $63 million and $58 million at March 31, 2018 and December 31, 2017, respectively.

10



Inventories
Inventories consist of the following (in thousands):
 
March 31,
 
December 31,
 
2018
 
2017
Aftermarket and refurbished products
$
1,915,537

 
$
1,877,653

Salvage and remanufactured products
469,648

 
487,108

Manufactured products
16,124

 
16,022

Total inventories
$
2,401,309

 
$
2,380,783

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

 
$
1,414,898

 
$
412,259

 
$
3,536,511

Business acquisitions and adjustments to previously recorded goodwill
584

 
259

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

 
202

 
39,821

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

 
$
1,457,667

 
$
407,484

 
$
3,572,198

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

 
$
664,969

Indefinite-lived intangible assets
 
 
 
Trademarks
81,300

 
78,800

Other indefinite-lived intangible assets
800

 

Total
$
740,804

 
$
743,769


11



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

 
$
(79,437
)
 
$
254,365

 
$
327,332

 
$
(75,095
)
 
$
252,237

Customer and supplier relationships
520,386

 
(185,417
)
 
334,969

 
510,113

 
(167,532
)
 
342,581

Software and other technology related assets
129,851

 
(65,070
)
 
64,781

 
124,049

 
(59,081
)
 
64,968

Covenants not to compete
13,920

 
(9,331
)
 
4,589

 
14,981

 
(9,798
)
 
5,183

Total
$
997,959

 
$
(339,255
)
 
$
658,704

 
$
976,475

 
$
(311,506
)
 
$
664,969


Our estimated useful lives for our finite-lived intangible assets are as follows:
 
Method of Amortization
 
Useful Life
Trade names and trademarks
Straight-line
 
4-30 years
Customer and supplier relationships
Accelerated
 
6-20 years
Software and other technology related assets
Straight-line
 
3-15 years
Covenants not to compete
Straight-line
 
2-5 years
Amortization expense for intangibles was $24 million and $23 million during the three months ended March 31, 2018 and 2017, respectively. Estimated amortization expense for each of the five years in the period ending December 31, 2022 is $75 million (for the remaining nine months of 2018), $85 million, $72 million, $60 million and $51 million, respectively.
Investments in Unconsolidated Subsidiaries
Our investment in unconsolidated subsidiaries was $208 million at both March 31, 2018 and December 31, 2017. On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen AB ("Mekonomen") from AxMeko AB, an affiliate of Axel Johnson AB, for an aggregate purchase price of $181 million. Headquartered in Stockholm, Sweden, Mekonomen is the leading independent car parts and service chain in the Nordic region of Europe, offering a range of products including spare parts and accessories for cars, and workshop services for consumers and businesses. We are accounting for our interest in Mekonomen using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over the investee. As of March 31, 2018, the book value of our investment in Mekonomen exceeded our share of the book value of Mekonomen's net assets by $125 million; this difference is primarily related to goodwill and the fair value of other intangible assets. We are recording our equity in the net earnings of Mekonomen on a one quarter lag. For the three months ended March 31, 2018 and 2017, we recorded equity in earnings totaling $2 million and $0.3 million, respectively, related to our investment in Mekonomen, which represents our share of the results for the three months ended December 31, 2017 and 2016, respectively, including adjustments to convert the results to GAAP and to recognize the impact of our purchase accounting adjustments. In May 2017, we received a cash dividend of $7 million (SEK 67 million) related to our investment in Mekonomen. The Level 1 fair value of our equity investment in the publicly traded Mekonomen common stock at March 31, 2018 was $163 million compared to a carrying value of $202 million. We evaluated our investment in Mekonomen for other-than-temporary impairment and concluded the decline in fair value was not other-than-temporary.

12



Warranty Reserve
Some of our salvage mechanical products are sold with a standard six month warranty against defects. Additionally, some of our remanufactured engines are sold with a standard three year warranty against defects. We also provide a limited lifetime warranty for certain of our aftermarket products. These assurance-type warranties are not considered a separate performance obligation and thus, no transaction price is allocated to it. We record the warranty costs in Cost of goods sold on our Unaudited Condensed Consolidated Statements of Income. Our warranty reserve is calculated using historical claim information to project future warranty claims activity and is recorded within Other accrued expenses and Other noncurrent liabilities on our Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments.
The changes in the warranty reserve are as follows (in thousands):
Balance as of December 31, 2017
$
23,151

Warranty expense
10,000

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

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

 
$
38,511

 
$
1,065,617

Prepaid expenses and other current assets
134,479

 
44,508

 
178,987

Liabilities
 
 
 
 
 
Refund liability

 
83,019

 
83,019

The impact of the adoption of ASC 606 on our Unaudited Condensed Consolidated Balance Sheet and Unaudited Condensed Consolidated Statement of Income as of and for the three months ended March 31, 2018 was as follows (in thousands):

13



 
Balance as of March 31, 2018
 
As Reported
 
Amounts Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Balance Sheet
 
 
 
 
 
Assets
 
 
 
 
 
Accounts receivable
$
1,211,788

 
$
1,165,618

 
$
46,170

Prepaid expenses and other current assets
180,367

 
127,358

 
53,009

Liabilities
 
 
 
 
 
Refund liability
99,179

 

 
99,179

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

 
$
2,728,712

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

 
1,674,173

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

 
767,459

 
(568
)
We have not included a table of the impact of the balance sheet adjustments on the Unaudited Condensed Consolidated Statement of Cash Flows as the adjustment will net to zero within the operating activities section of this statement.
Under ASC 606, we have elected not to adjust consideration for the effect of a significant financing component at contract inception if the period between the transfer of goods to the customer and payment received from the customer is one year or less. Generally, our payment terms are short term in nature, but in some instances we may offer extended terms to customers exceeding one year such that interest would be accrued with respect to those contracts. The interest that would be accrued related to these contracts is immaterial at March 31, 2018.
Under ASC 340, "Other Assets and Deferred Costs," we have elected to recognize incremental costs of obtaining a contract (commissions earned by our sales representatives on product sales) as an expense when incurred, as we believe the amortization period of the asset would be one year or less due to the short-term nature of our contracts.
Other Recently Adopted Accounting Pronouncements
During the first quarter of 2018, we adopted ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), which changes how entities will recognize, measure, present and make disclosures about certain financial assets and financial liabilities. The adoption of ASU 2016-01 did not have a significant impact on our financial position, results of operations, cash flows or disclosures.
During the first quarter of 2018, we adopted ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"), which includes guidance on classification for the following items: debt prepayment or debt extinguishment costs, settlement of zero coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and corporate-owned or bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and other separately identifiable cash flows where application of the predominance principle is prescribed. No adjustments were required in our Unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2018. Within our Unaudited Condensed Consolidating Statements of Cash Flows in Note 16, "Condensed Consolidating Financial Information," we now present a new line item, Payments of deferred purchase price on receivables securitization, as a result of adopting ASU 2016-15; prior year cash flow information within this footnote has been recast to reflect the impact of adopting this accounting standard. Other than the addition of this new line item, there was no impact to our Unaudited Condensed Consolidating Statements of Cash Flows.
During the first quarter of 2018, we adopted ASU No. 2017-01 "Clarifying the Definition of a Business" (“ASU 2017-01”), which requires an evaluation of whether substantially all of the fair value of assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If so, the transaction does not qualify as a business. The guidance also requires an acquired business to include at least one substantive process and narrows the definition of outputs.  The adoption of ASU 2017-01 did not have a material impact on our unaudited condensed consolidated financial statements.

14



During the first quarter of 2018, we adopted ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the reduction of the U.S. federal statutory income tax rate to 21% from 35% due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). In addition, under ASU 2018-02, an entity is required to provide certain disclosures regarding stranded tax effects. ASU 2018-02 is effective for fiscal years and interim periods beginning after December 15, 2018; early adoption is permitted. As a result of the adoption of ASU 2018-02, we recorded a $5 million reclassification to increase Accumulated Other Comprehensive (Loss) Income and decrease Retained Earnings.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, "Leases" ("ASU 2016-02"), to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between current GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under current GAAP. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The standard requires that entities apply the effects of these changes using a modified retrospective approach, which includes a number of optional practical expedients. While we are still in the process of quantifying the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements and related disclosures, we anticipate the adoption will materially affect our consolidated balance sheet and disclosures, as the majority of our operating leases will be recorded on the balance sheet under ASU 2016-02. While we do not anticipate the adoption of this accounting standard to have a material impact on our consolidated statements of income at this time, this conclusion may change as we finalize our assessment. In order to assist in our timely implementation of the new standard, we have purchased new software to track our leases. We have engaged a third party to assist with the implementation of the new software with an expectation to complete the implementation by the end of 2018.
In August 2017, the FASB issued ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"), which amends the hedge accounting recognition and presentation requirements in ASC 815 ("Derivatives and Hedging"). ASU 2017-12 significantly alters the hedge accounting model by making it easier for an entity to achieve and maintain hedge accounting and provides for accounting that better reflects an entity's risk management activities. ASU 2017-12 is effective for fiscal years and interim periods beginning after December 15, 2018; early adoption is permitted. Entities will adopt the provisions of ASU 2017-12 by applying a modified retrospective approach to existing hedging relationships as of the adoption date. At this time, we are still evaluating the impact of this standard on our financial statements.

Note 5. Revenue Recognition
The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to achieve this core principle, which includes:
1.
Identifying contracts with customers,
2.
Identifying performance obligations within those contracts,
3.
Determining the transaction price,
4.
Allocating the transaction price to the performance obligation in the contract, which may include an estimate of variable consideration, and
5.
Recognizing revenue when or as each performance obligation is satisfied.
The majority of our revenue is derived from the sale of vehicle parts. Under both the previous revenue standards and ASC 606, we recognize revenue when the products are shipped to, delivered to or picked up by customers and title has transferred.

15



Sources of Revenue
We report our revenue in two categories: (i) parts and services and (ii) other. The following table sets forth our revenue by category, with our parts and services revenue further disaggregated by reportable segment (in thousands):
 
Three Months Ended
 
March 31,
 
2018
 
2017
North America
$
1,172,585

 
$
1,079,875

Europe
1,037,046

 
819,167

Specialty
350,674

 
313,899

Parts and services
2,560,305

 
2,212,941

Other
160,459

 
129,902

Total revenue
$
2,720,764

 
$
2,342,843

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

Additional warranty revenue deferred
10,097

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

Other Revenue
Revenue from other sources includes scrap sales, bulk sales to mechanical manufacturers (including cores) and sales of aluminum ingots and sows from our furnace operations. We derive scrap metal from several sources, including vehicles that have been used in both our wholesale and self service recycling operations and from OEMs and other entities that contract with us for secure disposal of "crush only" vehicles. The sale of hulks in our wholesale and self service recycling operations represents one performance obligation, and revenue is recognized based on a price per weight when the customer (processor) collects the scrap. Some adjustments may occur when the customer weighs the scrap at their location, and revenue is adjusted accordingly. We constrain our estimate of consideration to be received to the extent that we believe there will be a significant reversal in revenue.
Revenue by Geographic Area
See Note 15, "Segment and Geographic Information" for information related to our revenue by geographic region.
Variable Consideration
The amount of revenue ultimately received from the customer can vary due to variable consideration which includes returns, discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items. The previous revenue guidance required us to estimate the transaction price using a best estimate approach. Under ASC 606 we are required to select the “expected value method” or the “most likely amount” method in order to estimate variable consideration. We utilize both methods in practice depending on the type of variable consideration. In addition, our estimates of variable

16



consideration are constrained to the extent that a significant reversal in revenue is expected. We recorded a refund liability and return asset for expected returns of $99 million and $53 million, respectively as of March 31, 2018 and a net reserve of $38 million as of December 31, 2017. The refund liability is presented separately on the balance sheet within liabilities while the return asset is presented within prepaid expenses and other current assets. Additionally, we recorded a reserve for our variable consideration of $44 million and $78 million as of March 31, 2018 and December 31, 2017, respectively. Variable consideration consists primarily of discounts, volume rebates, and other customer sales incentives which are recorded in Receivables, net on the Unaudited Condensed Consolidated Balance Sheets. While other customer incentive programs exist, we characterize them as material rights in the context of our sales transactions. We consider these programs to be immaterial to our consolidated financial statements.

Note 6. Restructuring and Acquisition Related Expenses
Acquisition Related Expenses
Acquisition related expenses, which include external costs such as legal, accounting and advisory fees, totaled $2 million and $3 million for the three months ended March 31, 2018 and 2017, respectively. Acquisition related expenses for the three months ended March 31, 2018 consisted of external costs for (i) completed acquisitions, (ii) pending acquisitions as of March 31, 2018, including $1 million related to Stahlgruber, and (iii) potential acquisitions that were terminated.
Acquisition related expenses for the three months ended March 31, 2017 consisted of $1 million of costs related to our acquisition of Andrew Page, with the remaining $2 million related to other completed acquisitions and acquisitions that were pending as of March 31, 2017.
Acquisition Integration Plans and Restructuring
During the three months ended March 31, 2018, we incurred $2 million of restructuring expenses. Expenses incurred during the three months ended March 31, 2018 were primarily related to the integration of our acquisition of Andrew Page. This integration included the closure of duplicate facilities and termination of employees.
During the three months ended March 31, 2017, we incurred less than $1 million of restructuring expenses, primarily related to the ongoing integration activities in our Specialty segment. Expenses incurred were primarily related to facility closure and the merger of existing facilities into larger distribution centers.
We expect to incur additional expenses related to the integration of certain of our acquisitions into our existing operations in 2018. These integration activities are expected to include the closure of duplicate facilities, rationalization of personnel in connection with the consolidation of overlapping facilities with our existing business, and moving expenses. Future expenses to complete these integration plans are expected to be less than $15 million.

Note 7. Stock-Based Compensation
In order to attract and retain employees, non-employee directors, consultants, and other persons associated with us, we may grant qualified and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares and performance units under the LKQ Corporation 1998 Equity Incentive Plan (the “Equity Incentive Plan”). We have granted RSUs, stock options, and restricted stock under the Equity Incentive Plan. We expect to issue new shares of common stock to cover past and future equity grants.
RSUs
RSUs vest over periods of up to five years, subject to a continued service condition. Currently outstanding RSUs contain either a time-based vesting condition or a combination of a performance-based vesting condition and a time-based vesting condition, in which case both conditions must be met before any RSUs vest. For most of the RSUs containing a performance-based vesting condition, the Company must report positive diluted earnings per share, subject to certain adjustments, during any fiscal year period within five years following the grant date; we have an immaterial amount of RSUs containing other performance-based vesting conditions. Each RSU converts into one share of LKQ common stock on the applicable vesting date. The grant date fair value of RSUs is based on the market price of LKQ stock on the grant date.
The fair value of RSUs that vested during the three months ended March 31, 2018 was $15 million.

17



The following table summarizes activity related to our RSUs under the Equity Incentive Plan for the three months ended March 31, 2018:
 
Number
Outstanding
 
Weighted
Average
Grant Date
Fair Value
 
Weighted Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
   (in thousands) (1)
Unvested as of January 1, 2018
1,624,390

 
$
29.94

 
 
 
 
Granted
562,380

 
$
43.35

 
 
 
 
Vested
(359,863
)
 
$
29.00

 
 
 
 
Forfeited / Canceled
(18,015
)
 
$
31.29

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

 
$
34.28

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

 
$
34.26

 
3.0
 
$
61,883

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

 
$
9.20

 
 
 
 
Exercised
(226,260
)
 
$
9.97

 
 
 
$
7,123

Canceled
(509
)
 
$
32.31

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

 
$
9.08

 
1.4
 
$
43,631

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

 
$
9.08

 
1.4
 
$
43,631

(1) The aggregate intrinsic value of outstanding and exercisable options represents the total pretax intrinsic value (the difference between the fair value of the Company's stock on the last day of each period and the exercise price, multiplied by the number of options where the fair value exceeds the exercise price) that would have been received by the option holders had all option holders exercised their options as of the last day of the period indicated. This amount changes based on the market price of the Company’s common stock.
Stock-Based Compensation Expense
Total pre-tax stock-based compensation expense for RSUs totaled $6 million and $7 million for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, unrecognized compensation expense related to unvested RSUs is $51 million. Stock-based compensation expense related to these awards will be different to the extent that forfeitures are realized.


18



Note 8. Earnings Per Share
The following chart sets forth the computation of earnings per share (in thousands, except per share amounts):
 
Three Months Ended
 
March 31,
 
2018
 
2017
Income from continuing operations
$
152,763

 
$
140,809

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

 
308,028

Effect of dilutive securities:
 
 
 
RSUs
619

 
564

Stock options
1,211

 
1,708

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

 
310,300

Basic earnings per share from continuing operations
$
0.49

 
$
0.46

Diluted earnings per share from continuing operations
$
0.49

 
$
0.45

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

 
147

Stock options

 
78


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

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

 
(4,501
)
 
(629
)
 

 
43,305

Income tax effect
 
50

 
1,053

 
8

 

 
1,111

Reclassification of unrealized loss
 

 
8,747

 

 

 
8,747

Reclassification of deferred income taxes
 

 
(2,045
)
 

 

 
(2,045
)
Other comprehensive loss from unconsolidated subsidiaries
 

 

 

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

 
2,486

 

 

 
5,345

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

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


19



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

 
$
(2,737
)
 
$

 
$
(267,175
)
Pretax income
 
20,068

 
832

 
836

 

 
21,736

Income tax effect
 

 
(356
)
 
(318
)
 

 
(674
)
Reclassification of unrealized loss (gain)
 

 
4,257

 
(171
)
 

 
4,086

Reclassification of deferred income taxes
 

 
(1,570
)
 
48

 

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

 

 
(3,436
)
 

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

 

 

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

 
$
(5,778
)
 
$
(162
)
 
$
(245,636
)
Net unrealized gains on our interest rate swaps totaling $2 million and net unrealized losses of $1 million were reclassified to Interest expense, net in our Unaudited Condensed Consolidated Statements of Income during the three months ended March 31, 2018 and 2017, respectively. We also reclassified gains of $1 million and $2 million to Interest expense, net related to our cross currency swaps during the three months ended March 31, 2018 and 2017, respectively. Also related to our cross currency swaps, we reclassified losses of $12 million and $5 million to Other income, net in our Unaudited Condensed Consolidated Statements of Income during the three months ended March 31, 2018 and 2017, respectively; these gains and losses offset the impact of the remeasurement of the underlying contracts. The deferred income taxes related to our cash flow hedges were reclassified from Accumulated other comprehensive income (loss) to provision for income taxes.
As a result of the adoption of ASU 2018-02 in the first quarter of 2018, we recorded a $5 million reclassification to increase Accumulated Other Comprehensive (Loss) Income and decrease Retained Earnings. See Note 4, "Financial Statement Information" for further information regarding the adoption of ASU 2018-02.

Note 10. Long-Term Obligations
Long-term obligations consist of the following (in thousands):
 
March 31,
 
December 31,
 
2018
 
2017
Senior secured credit agreement:
 
 
 
Term loans payable
$
700,395

 
$
704,800

Revolving credit facilities
1,172,140

 
1,283,551

U.S. Notes (2023)
600,000

 
600,000

Euro Notes (2024)
616,200

 
600,150

Receivables securitization facility
100,000

 
100,000

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

 
29,146

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

 
110,633

Total debt
3,339,088

 
3,428,280

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

 
3,403,980

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

 
$
3,277,620





20



Senior Secured Credit Agreement
On December 1, 2017, LKQ Corporation, LKQ Delaware LLP, and certain other subsidiaries (collectively, the "Borrowers") entered into Amendment No. 2 to the Fourth Amended and Restated Credit Agreement ("Credit Agreement"), which amended the Fourth Amended and Restated Credit Agreement dated January 29, 2016 by modifying certain terms to (1) extend the maturity date by approximately two years to January 29, 2023; (2) increase the total availability under the revolving credit facility's multicurrency component from $2.45 billion to $2.75 billion; (3) increase the permitted net leverage ratio thresholds, including a temporary step-up in the allowable net leverage ratio in the case of permitted acquisitions; (4) modify the applicable margins and fees in the pricing grid; (5) increase the ability of LKQ and its subsidiaries to incur additional indebtedness; and (6) make other immaterial or clarifying modifications and amendments. The increase in the revolving credit facility's multicurrency component of $300 million will be used for general corporate purposes.
Amounts under the revolving credit facility are due and payable upon maturity of the Credit Agreement on January 29, 2023. Term loan borrowings, which totaled $700 million as of March 31, 2018, are due and payable in quarterly installments equal to $4 million on the last day of each fiscal quarter ending on or after March 31, 2018 and prior to March 31, 2019 and $9 million on the last day of each fiscal quarter ending on or after March 31, 2019, with the remaining balance due and payable on January 29, 2023.
We are required to prepay the term loan by amounts equal to proceeds from the sale or disposition of certain assets if the proceeds are not reinvested within twelve months. We also have the option to prepay outstanding amounts under the Credit Agreement without penalty.
The Credit Agreement contains customary representations and warranties and customary covenants that provide limitations and conditions on our ability to enter into certain transactions. The Credit Agreement also contains financial and affirmative covenants, including limitations on our net leverage ratio and a minimum interest coverage ratio.
Borrowings under the Credit Agreement bear interest at variable rates, which depend on the currency and duration of the borrowing elected, plus an applicable margin. The applicable margin is subject to change in increments of 0.25% depending on our net leverage ratio. Interest payments are due on the last day of the selected interest period or quarterly in arrears depending on the type of borrowing. Including the effect of the interest rate swap agreements described in Note 11, "Derivative Instruments and Hedging Activities," the weighted average interest rates on borrowings outstanding under the Credit Agreement at both March 31, 2018 and December 31, 2017 were 2.2%. We also pay a commitment fee based on the average daily unused amount of the revolving credit facilities. The commitment fee is subject to change in increments of 0.025% and 0.05% depending on our net leverage ratio. In addition, we pay a participation commission on outstanding letters of credit at an applicable rate based on our net leverage ratio, and a fronting fee of 0.125% to the issuing bank, which are due quarterly in arrears.
Of the total borrowings outstanding under the Credit Agreement, $22 million and $18 million were classified as current maturities at March 31, 2018 and December 31, 2017. As of March 31, 2018, there were letters of credit outstanding in the aggregate amount of $65 million. The amounts available under the revolving credit facilities are reduced by the amounts outstanding under letters of credit, and thus availability under the revolving credit facilities at March 31, 2018 was $1.5 billion.
Related to the execution of Amendment No. 2 to the Fourth Amended and Restated Credit Agreement in December 2017, we incurred $5 million of fees, the majority of which were capitalized as an offset to Long-Term Obligations and are amortized over the term of the agreement.
U.S. Notes (2023)
In 2013, we issued $600 million aggregate principal amount of 4.75% senior notes due 2023 (the "U.S. Notes (2023)"). The U.S. Notes (2023) are governed by the Indenture dated as of May 9, 2013 (the "U.S. Notes (2023) Indenture") among LKQ Corporation, certain of our subsidiaries (the "Guarantors") and U.S. Bank National Association, as trustee. The U.S. Notes (2023) are registered under the Securities Act of 1933.
The U.S. Notes (2023) bear interest at a rate of 4.75% per year from the most recent payment date on which interest has been paid or provided for. Interest on the U.S. Notes (2023) is payable in arrears on May 15 and November 15 of each year. The U.S. Notes (2023) are fully and unconditionally guaranteed, jointly and severally, by the Guarantors.
The U.S. Notes (2023) and the related guarantees are, respectively, LKQ Corporation's and each Guarantor's senior unsecured obligations and are subordinated to all of the Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the U.S. Notes (2023) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the U.S. Notes (2023) to the extent of the assets of those subsidiaries.

21



Euro Notes (2024)
On April 14, 2016, LKQ Italia Bondco S.p.A. (“LKQ Italia”), an indirect, wholly-owned subsidiary of LKQ Corporation, completed an offering of €500 million aggregate principal amount of senior notes due April 1, 2024 (the “Euro Notes (2024)”) in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering were used to repay a portion of the revolver borrowings under the Credit Agreement and to pay related fees and expenses. The Euro Notes (2024) are governed by the Indenture dated as of April 14, 2016 (the “Euro Notes (2024) Indenture”) among LKQ Italia, LKQ Corporation and certain of our subsidiaries (the “Euro Notes (2024) Subsidiaries”), the trustee, and the paying agent, transfer agent, and registrar.
The Euro Notes (2024) bear interest at a rate of 3.875% per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for. Interest on the Euro Notes (2024) is payable in arrears on April 1 and October 1 of each year. The Euro Notes (2024) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2024) Subsidiaries (the "Euro Notes (2024) Guarantors").
The Euro Notes (2024) and the related guarantees are, respectively, LKQ Italia’s and each Euro Notes (2024) Guarantor’s senior unsecured obligations and are subordinated to all of LKQ Italia's and the Euro Notes (2024) Guarantors’ existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2024) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2024) to the extent of the assets of those subsidiaries. The Euro Notes (2024) have been listed on the ExtraMOT, Professional Segment of the Borsa Italia S.p.A. securities exchange and the Global Exchange Market of the Irish Stock Exchange.
Euro Notes (2026/28) - Subsequent Event
On April 9, 2018, LKQ European Holdings B.V. ("LKQ Euro Holdings"), a wholly-owned subsidiary of LKQ Corporation, completed an offering of €1.0 billion aggregate principal amount of senior notes. The offering consisted of €750 million senior notes due 2026 (the "2026 notes") and €250 million senior notes due 2028 (the "2028 notes" and, together with the 2026 notes, the "Euro Notes (2026/28)") in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering, together with borrowings under our senior secured credit facility, will be used to (i) finance a portion of the consideration payable for the pending Stahlgruber acquisition, (ii) for general corporate purposes and (iii) to pay related fees and expenses, including the refinancing of net financial debt. The Euro Notes (2026/28) are governed by the Indenture dated as of April 9, 2018 (the “Euro Notes (2026/28) Indenture”) among LKQ Euro Holdings, the Company and certain of the Company’s subsidiaries (the “Euro Notes (2026/28) Subsidiaries”), the trustee, paying agent, transfer agent, and registrar.
The 2026 notes and 2028 notes bear interest at a rate of 3.625% and 4.125%, respectively, per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for. Interest on the Euro Notes (2026/28) is payable in arrears on April 1 and October 1 of each year, beginning on October 1, 2018. The Euro Notes (2026/28) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2026/28) Subsidiaries (the "Euro Notes (2026/28) Guarantors").
The Euro Notes (2026/28) and the related guarantees are, respectively, LKQ Euro Holdings' and each Euro Notes (2026/28) Guarantor’s senior unsecured obligations and will be subordinated to all of LKQ Euro Holdings' and the Euro Notes (2026/28) Guarantors’ existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2026/28) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2026/28) to the extent of the assets of those subsidiaries. We have agreed to use commercially reasonable efforts to cause the Euro Notes (2026/28) to be listed on the Global Exchange Market of Euronext Dublin as promptly as practicable after the issue date of the Euro Notes (2026/28) (and in any event prior to May 24, 2018, the 45th day following the issue date of the notes). In addition to other conventional redemption provisions, the Euro Notes (2026/28) are subject to a special mandatory redemption in the event that on or prior to October 6, 2018, (a) the Stahlgruber acquisition is not consummated or (b) the purchase and sale agreement governing the Stahlgruber acquisition is terminated. The special mandatory redemption price will be equal to 100% of the initial issue price of the notes, plus accrued and unpaid interest from the date of initial issuance (or, if after the October 1, 2018 interest payment date, from October 1, 2018) up to, but excluding, the special mandatory redemption date.
Receivables Securitization Facility
On November 29, 2016, we amended the terms of our receivables securitization facility with The Bank of Tokyo-Mitsubishi UFJ, LTD. ("BTMU") to: (i) extend the term of the facility to November 8, 2019; (ii) increase the maximum amount available to $100 million; and (iii) make other clarifying and updating changes. Under the facility, LKQ sells an ownership interest in certain receivables, related collections and security interests to BTMU for the benefit of conduit investors and/or financial institutions for cash proceeds. Upon payment of the receivables by customers, rather than remitting to BTMU the

22



amounts collected, LKQ retains such collections as proceeds for the sale of new receivables generated by certain of the ongoing operations of the Company.
The sale of the ownership interest in the receivables is accounted for as a secured borrowing in our Consolidated Balance Sheets, under which the receivables included in the program collateralize the amounts invested by BTMU, the conduit investors and/or financial institutions (the "Purchasers"). The receivables are held by LKQ Receivables Finance Company, LLC ("LRFC"), a wholly owned bankruptcy-remote special purpose subsidiary of LKQ, and therefore, the receivables are available first to satisfy the creditors of LRFC, including the Purchasers. As of both March 31, 2018 and December 31, 2017, $144 million of net receivables were collateral for the investment under the receivables facility.
Under the receivables facility, we pay variable interest rates plus a margin on the outstanding amounts invested by the Purchasers. The variable rates are based on (i) commercial paper rates, (ii) the London InterBank Offered Rate ("LIBOR"), or (iii) base rates, and are payable monthly in arrears. The commercial paper rate is the applicable variable rate unless conduit investors are not available to invest in the receivables at commercial paper rates. In such case, financial institutions will invest at the LIBOR rate or at base rates. We also pay a commitment fee on the excess of the investment maximum over the average daily outstanding investment, payable monthly in arrears. As of March 31, 2018, the interest rate under the receivables facility was based on commercial paper rates and was 2.7%. The outstanding balances of $100 million as of both March 31, 2018 and December 31, 2017, were classified as long-term on the Unaudited Condensed Consolidated Balance Sheets because we have the ability and intent to refinance these borrowings on a long-term basis.

Note 11. Derivative Instruments and Hedging Activities
We are exposed to market risks, including the effect of changes in interest rates, foreign currency exchange rates and commodity prices. Under our current policies, we use derivatives to manage our exposure to variable interest rates on our senior secured debt and changing foreign exchange rates for certain foreign currency denominated transactions. We do not hold or issue derivatives for trading purposes.
Cash Flow Hedges
We hold interest rate swap agreements to hedge a portion of the variable interest rate risk on our variable rate borrowings under our Credit Agreement, with the objective of minimizing the impact of interest rate fluctuations and stabilizing cash flows. Under the terms of the interest rate swap agreements, we pay the fixed interest rate and receive payment at a variable rate of interest based on LIBOR for the respective currency of each interest rate swap agreement’s notional amount. The effective portion of changes in the fair value of the interest rate swap agreements is recorded in Accumulated Other Comprehensive Income (Loss) and is reclassified to interest expense when the underlying interest payment has an impact on earnings. The ineffective portion of changes in the fair value of the interest rate swap agreements is reported in interest expense. Our interest rate swap contracts have maturity dates ranging from January to June 2021. As of March 31, 2018, we held interest rate swap contracts representing $590 million of U.S. dollar-denominated debt.
From time to time, we may hold foreign currency forward contracts related to certain foreign currency denominated intercompany transactions, with the objective of minimizing the impact of fluctuating exchange rates on these future cash flows. Under the terms of the foreign currency forward contracts, we will sell the foreign currency in exchange for U.S. dollars at a fixed rate on the maturity dates of the contracts. The effective portion of the changes in fair value of the foreign currency forward contracts is recorded in Accumulated Other Comprehensive Income (Loss) and reclassified to other income, net when the underlying transaction has an impact on earnings.
In 2016, we entered into three cross currency swap agreements for a total notional amount of $422 million (€400 million). The notional amount steps down by €15 million annually through 2020 with the remainder maturing in January 2021. These cross currency swaps contain an interest rate swap component and a foreign currency forward contract component that, combined with related intercompany financing arrangements, effectively convert variable rate U.S. dollar-denominated borrowings into fixed rate euro-denominated borrowings. The swaps are intended to minimize the impact of fluctuating exchange rates and interest rates on the cash flows resulting from the related intercompany financing arrangements. The effective portion of the changes in the fair value of the derivative instruments is recorded in Accumulated Other Comprehensive Income (Loss) and is reclassified to interest expense, net when the underlying transactions have an impact on earnings.

23



The following table summarizes the notional amounts and fair values of our designated cash flow hedges as of March 31, 2018 and December 31, 2017 (in thousands):
 
 
Notional Amount
 
Fair Value at March 31, 2018 (USD)
 
Fair Value at December 31, 2017 (USD)
 
 
March 31, 2018
 
December 31, 2017
 
Other Assets
 
Other Noncurrent Liabilities
 
Other Assets
 
Other Noncurrent Liabilities
Interest rate swap agreements
 
 
 
 
 
 
 
 
USD denominated
 
$
590,000

 
$
590,000

 
$
24,253

 
$

 
$
19,102

 
$

Cross currency swap agreements
 
 
 
 
 
 
 
 
USD/euro
 
$
402,580

 
$
406,546

 
9,208

 
77,812

 
5,504

 
61,492

Total cash flow hedges
 
$
33,461

 
$
77,812

 
$
24,606

 
$
61,492

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

Note 12. Fair Value Measurements
Financial Assets and Liabilities Measured at Fair Value
We use the market and income approaches to estimate the fair value our financial assets and liabilities, and during the three months ended March 31, 2018, there were no significant changes in valuation techniques or inputs related to the financial assets or liabilities that we have historically recorded at fair value. The tiers in the fair value hierarchy include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

24



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, 2018 and December 31, 2017 (in thousands):
 
Balance as of March 31, 2018
 
Fair Value Measurements as of March 31, 2018
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Cash surrender value of life insurance
$
46,196

 
$

 
$
46,196

 
$

Interest rate swaps
24,253

 

 
24,253

 

Cross currency swap agreements
9,208

 

 
9,208

 

Total Assets
$
79,657

 
$

 
$
79,657

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liabilities
$
2,700

 
$

 
$

 
$
2,700

Deferred compensation liabilities
50,676

 

 
50,676

 

Cross currency swap agreements
77,812

 

 
77,812

 

Total Liabilities
$
131,188

 
$

 
$
128,488

 
$
2,700

 
Balance as of December 31, 2017
 
Fair Value Measurements as of December 31, 2017
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Cash surrender value of life insurance
$
45,984

 
$

 
$
45,984

 
$

Interest rate swaps
19,102

 

 
19,102

 

Cross currency swap agreements
5,504

 

 
5,504

 

Total Assets
$
70,590

 
$

 
$
70,590

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liabilities
$
2,636

 
$

 
$

 
$
2,636

Deferred compensation liabilities
47,199

 

 
47,199

 

Cross currency swap agreements
61,492

 

 
61,492

 

Total Liabilities
$
111,327

 
$

 
$
108,691

 
$
2,636

The cash surrender value of life insurance 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 cross currency swap agreements is presented in Note 11, "Derivative Instruments and Hedging Activities."
Our Level 2 assets and liabilities are valued using inputs from third parties and market observable data. We obtain valuation data for the cash surrender value of life insurance and deferred compensation liabilities from third party sources, which determine the net asset values for our accounts using quoted market prices, investment allocations and reportable trades. We 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.
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, 2018 and December 31, 2017, the fair value of our credit agreement borrowings reasonably approximated the

25



carrying values of $1.9 billion and $2.0 billion, respectively. In addition, based on market conditions, the fair values of the outstanding borrowings under the receivables facility reasonably approximated the carrying values of $100 million at both March 31, 2018 and December 31, 2017. As of March 31, 2018 and December 31, 2017, the fair values of the U.S. Notes (2023) were approximately $602 million and $615 million, respectively, compared to a carrying value of $600 million. As of March 31, 2018 and December 31, 2017, the fair values of the Euro Notes (2024) were approximately $652 million and $658 million compared to carrying values of $616 million and $600 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, 2018 to assume these obligations. The fair value of our U.S. Notes (2023) is classified as Level 1 within the fair value hierarchy since it is determined based upon observable market inputs including quoted market prices in an active market. The fair value of our Euro Notes (2024) 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 13. 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, 2018 are as follows (in thousands):
Nine months ending December 31, 2018
$
186,038

Years ending December 31:
 
2019
207,724

2020
171,530

2021
132,755

2022
107,405

2023
91,007

Thereafter
532,760

Future Minimum Lease Payments
$
1,429,219

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 14. Income Taxes
At the end of each interim period, we estimate our annual effective tax rate and apply that rate to our interim earnings. We also record the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and the effects of changes in tax laws or rates, in the interim period in which they occur.
The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in state and foreign jurisdictions, permanent and temporary differences between book and taxable income, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.    
Our effective income tax rate for the three months ended March 31, 2018 was 24.7%, compared to 33.9% for the comparable prior year period. The decrease was primarily attributable to the reduction of the U.S. federal statutory income tax rate from 35% to 21% as a result of the enactment of the Tax Act in December 2017. The effective tax rate also reflects the impact of favorable discrete items of approximately $3 million for each of the three months ended March 31, 2018 and 2017 for excess tax benefits from stock-based payments. The quarter over quarter change in these amounts increased the effective tax rate by 0.2% compared to the prior year. 

26



The Tax Act introduced broad and complex changes to the U.S. tax code, including the aforementioned reduction in the U.S. corporate tax rate, a one-time transition tax on the historical unremitted earnings of foreign subsidiaries, and a new minimum tax on foreign earnings (Global Intangible Low-Taxed Income, “GILTI”). On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the related accounting for provisional amounts under ASC 740, "Accounting for Income Taxes."
As a result of the Tax Act, in 2017, we recognized a provisional tax liability of $51 million related to the one-time transition tax on historical foreign earnings, payable over a period of eight years. We also recorded a provisional decrease to net U.S. deferred tax liabilities of $73 million. For a description of the impact of the Tax Act for the year ended December 31, 2017, refer to Note 13, "Income Taxes" of our financial statements as of and for the year ended December 31, 2017 included in the 2017 Form 10-K. During the three-month period ended March 31, 2018, there were no changes made to the provisional amounts recognized in 2017. We continue to gather the information necessary to finalize those provisional amounts. Our estimates could be affected as we gain a more thorough understanding of the Tax Act from additional guidance issued by the U.S. tax authorities. Changes to the provisional estimates of the tax effect of the Tax Act will be recorded as a discrete item in the interim period the amounts are considered complete.
The Company has included the estimated 2018 impact of the GILTI Tax as a period cost and included it as part of the estimated annual effective tax rate. The 2018 estimated annual effective tax rate also includes the impact of all other U.S. tax reform provisions that were effective on January 1, 2018. These estimates are subject to change as additional guidance on the tax reform provisions is issued.

Note 15. 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
 
Europe
 
Specialty
 
Eliminations
 
Consolidated
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Third Party
$
1,329,660

 
$
1,040,430

 
$
350,674

 
$

 
$
2,720,764

Intersegment
183

 

 
1,118

 
(1,301
)
 

Total segment revenue
$
1,329,843

 
$
1,040,430

 
$
351,792

 
$
(1,301
)
 
$
2,720,764

Segment EBITDA
$
177,713

 
$
75,534

 
$
41,969

 
$

 
$
295,216

Depreciation and amortization (1)
21,228

 
32,757

 
7,081

 

 
61,066

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 (1)
20,378

 
24,751

 
5,475

 

 
50,604

(1)
Amounts presented include depreciation and amortization expense recorded within cost of goods sold.
The key measure of segment profit or loss reviewed by our chief operating decision maker, who is our Chief Executive Officer, is Segment EBITDA. Segment EBITDA includes revenue and expenses that are controllable by the segment. Corporate general and administrative expenses are allocated to the segments based on usage, with shared expenses apportioned based on the segment's percentage of consolidated revenue. We calculate Segment EBITDA as EBITDA excluding restructuring and acquisition related expenses, change in fair value of contingent consideration liabilities, other acquisition

27



related gains and losses and equity in earnings of unconsolidated subsidiaries. EBITDA, which is the basis for Segment EBITDA, is calculated as net income excluding noncontrolling interest, discontinued operations, depreciation, amortization, interest and income tax expense.
The table below provides a reconciliation of Net Income to Segment EBITDA (in thousands):
 
Three Months Ended
 
March 31,
2018
 
2017
Net income
$
152,763

 
$
136,278

Less: net loss attributable to noncontrolling interest
(197
)
 

Net income attributable to LKQ stockholders
152,960

 
136,278

Subtract:
 
 
 
Net loss from discontinued operations

 
(4,531
)
Net income from continuing operations attributable to LKQ stockholders
152,960

 
140,809

Add:
 
 
 
Depreciation and amortization
56,458

 
48,656

Depreciation and amortization - cost of goods sold
4,608

 
1,948

Interest expense, net
28,515

 
23,988

Provision for income taxes
49,584

 
72,155

EBITDA
292,125

 
287,556

Subtract:
 
 
 
Equity in earnings of unconsolidated subsidiaries
1,412

 
214

Add:
 
 
 
Restructuring and acquisition related expenses (1)
4,054

 
2,928

Inventory step-up adjustment - acquisition related
403

 

Change in fair value of contingent consideration liabilities
46

 

Segment EBITDA
$
295,216

 
$
290,270

(1)
See Note 6, "Restructuring and Acquisition Related Expenses," for further information.
The following table presents capital expenditures by reportable segment (in thousands):
 
Three Months Ended
March 31,
2018
 
2017
Capital Expenditures
 
 
 
North America
$
29,662

 
$
16,760

Europe
28,815

 
20,458

Specialty
3,712

 
3,582

Discontinued operations

 
3,598

Total capital expenditures
$
62,189

 
$
44,398


28



The following table presents assets by reportable segment (in thousands):
 
March 31,
 
December 31,
2018
 
2017
Receivables, net
 
 
 
North America
$
448,973

 
$
379,666

Europe
622,592

 
555,372

Specialty
140,223

 
92,068

Total receivables, net (1)
1,211,788

 
1,027,106

Inventories
 
 
 
North America
1,053,322

 
1,076,393

Europe
998,617

 
964,068

Specialty
349,370

 
340,322

Total inventories
2,401,309

 
2,380,783

Property, Plant and Equipment, net
 
 
 
North America
542,453

 
537,286

Europe
304,048

 
293,539

Specialty
83,255

 
82,264

Total property, plant and equipment, net
929,756

 
913,089

Equity Method Investments
 
 
 
North America
336

 
336

Europe 
207,874

 
208,068

Total equity method investments
208,210

 
208,404

Other unallocated assets
4,885,115

 
4,837,490

Total assets
$
9,636,178

 
$
9,366,872

(1)
Refer to Note 4, "Financial Statement Information," for the increase in total receivables, net compared to December 31, 2017 as a result of the adoption of ASC 606.
We report net receivables; inventories; net property, plant and equipment; and equity method investments by segment as that information is used by the chief operating decision maker in assessing segment performance. These assets provide a measure for the operating capital employed in each segment. Unallocated assets include cash, prepaid and other current and noncurrent assets, goodwill, other intangibles 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, Italy, Czech Republic, Poland, Slovakia and other European countries. Our operations in other countries include operations in Canada, engine remanufacturing and bumper refurbishing operations in Mexico, an aftermarket parts freight consolidation warehouse in Taiwan, and administrative support functions in India. Our net sales are attributed to geographic area based on the location of the selling operation.
The following table sets forth our revenue by geographic area (in thousands):
 
Three Months Ended
 
March 31,
 
2018
 
2017
Revenue
 
 
 
United States
$
1,560,027

 
$
1,417,040

United Kingdom
430,992

 
382,652

Other countries
729,745

 
543,151

Total revenue
$
2,720,764

 
$
2,342,843



29



The following table sets forth our tangible long-lived assets by geographic area (in thousands):
 
March 31,
 
December 31,
 
2018
 
2017
Long-lived Assets
 
 
 
United States
$
589,848

 
$
583,236

United Kingdom
186,347

 
178,021

Other countries
153,561

 
151,832

Total long-lived assets
$
929,756

 
$
913,089


Note 16. Condensed Consolidating Financial Information
LKQ Corporation (the "Parent") issued, and the Guarantors have fully and unconditionally guaranteed, jointly and severally, the U.S. Notes (2023) due on May 15, 2023. A Guarantor's guarantee will be unconditionally and automatically released and discharged upon the occurrence of any of the following events: (i) a transfer (including as a result of consolidation or merger) by the Guarantor to any person that is not a Guarantor of all or substantially all assets and properties of such Guarantor, provided the Guarantor is also released from its obligations with respect to indebtedness under the Credit Agreement or other indebtedness of ours, which obligation gave rise to the guarantee of the U.S. Notes (2023); (ii) a transfer (including as a result of consolidation or merger) to any person that is not a Guarantor of the equity interests of a Guarantor or issuance by a Guarantor of its equity interests such that the Guarantor ceases to be a subsidiary, as defined in the U.S. Notes (2023) Indenture, provided the Guarantor is also released from its obligations with respect to indebtedness under the Credit Agreement or other indebtedness of ours, which obligation gave rise to the guarantee of the U.S. Notes (2023); (iii) the release of the Guarantor from its obligations with respect to indebtedness under the Credit Agreement or other indebtedness of ours, which obligation gave rise to the guarantee of the U.S. Notes (2023); and (iv) upon legal defeasance, covenant defeasance or satisfaction and discharge of the U.S. Notes (2023) Indenture, as defined in the U.S. Notes (2023) Indenture.
Presented below are the unaudited condensed consolidating financial statements of the Parent, the Guarantors, the non-guarantor subsidiaries (the "Non-Guarantors"), and the elimination entries necessary to present our financial statements on a consolidated basis as required by Rule 3-10 of Regulation S-X of the Securities Exchange Act of 1934 resulting from the guarantees of the U.S. Notes (2023). Investments in consolidated subsidiaries have been presented under the equity method of accounting. The principal elimination entries eliminate investments in subsidiaries, intercompany balances, and intercompany revenue and expenses. The unaudited condensed consolidating financial statements below have been prepared from our financial information on the same basis of accounting as the unaudited condensed consolidated financial statements, and may not necessarily be indicative of the financial position, results of operations or cash flows had the Parent, Guarantors and Non-Guarantors operated as independent entities.

30



LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidating Statements of Income
(In thousands)
 
For the Three Months Ended March 31, 2018
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Revenue
$

 
$
1,577,595

 
$
1,180,242

 
$
(37,073
)
 
$
2,720,764

Cost of goods sold

 
945,915

 
757,951

 
(37,073
)
 
1,666,793

Gross margin

 
631,680

 
422,291

 

 
1,053,971

Selling, general and administrative expenses
9,130

 
426,797

 
330,964

 

 
766,891

Restructuring and acquisition related expenses

 
330

 
3,724

 

 
4,054

Depreciation and amortization
29

 
24,338

 
32,091

 

 
56,458

Operating (loss) income
(9,159
)
 
180,215

 
55,512

 

 
226,568

Other expense (income):
 
 
 
 
 
 
 
 
 
Interest expense, net
18,008

 
212

 
10,295

 

 
28,515

Intercompany interest (income) expense, net
(15,400
)
 
9,680

 
5,720

 

 

Other (income) expense, net
(1,015
)
 
(5,882
)
 
4,015

 

 
(2,882
)
Total other expense, net
1,593

 
4,010