10-Q 1 lkq-20190331_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, 2019
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

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $.01 per share
 
LKQ
 
NASDAQ Global Select Market
________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated 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 22, 2019, the registrant had outstanding an aggregate of 313,994,156 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,
 
2019
 
2018
Revenue
$
3,100,303

 
$
2,720,764

Cost of goods sold
1,892,039

 
1,666,793

Gross margin
1,208,264

 
1,053,971

Selling, general and administrative expenses
896,532

 
766,891

Restructuring and acquisition related expenses
3,307

 
4,054

Impairment of net assets held for sale
15,023

 

Depreciation and amortization
71,002

 
56,458

Operating income
222,400

 
226,568

Other expense (income):
 
 
 
Interest expense, net of interest income
36,089

 
28,515

Other income, net
(3,851
)
 
(2,882
)
Total other expense, net
32,238

 
25,633

Income before provision for income taxes
190,162

 
200,935

Provision for income taxes
51,550

 
49,584

Equity in (losses) earnings of unconsolidated subsidiaries
(39,549
)
 
1,412

Net income
99,063

 
152,763

Less: net income (loss) attributable to noncontrolling interest
1,015

 
(197
)
Net income attributable to LKQ stockholders
$
98,048

 
$
152,960

 
 
 
 
Basic earnings per share: (1)
 
 
 
Net income
$
0.31

 
$
0.49

Less: net income (loss) attributable to noncontrolling interest
0.00

 
(0.00
)
Net income attributable to LKQ stockholders
$
0.31

 
$
0.49

 
 
 
 
Diluted earnings per share: (1)
 
 
 
Net income
$
0.31

 
$
0.49

Less: net income (loss) attributable to noncontrolling interest
0.00

 
(0.00
)
Net income attributable to LKQ stockholders
$
0.31

 
$
0.49

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




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




LKQ CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income
(In thousands)
 
Three Months Ended
 
March 31,
 
2019
 
2018
Net income
$
99,063

 
$
152,763

Less: net income (loss) attributable to noncontrolling interest
1,015

 
(197
)
Net income attributable to LKQ stockholders
98,048

 
152,960

 
 
 
 
Other comprehensive income (loss):
 
 
 
Foreign currency translation, net of tax
(9,895
)
 
48,485

Net change in unrealized gains/losses on cash flow hedges, net of tax
(2,737
)
 
3,254

Net change in unrealized gains/losses on pension plans, net of tax
191

 
(621
)
Net change in other comprehensive loss from unconsolidated subsidiaries
(3,463
)
 
(605
)
Other comprehensive (loss) income
(15,904
)
 
50,513

 
 
 
 
Comprehensive income
83,159

 
203,276

Less: comprehensive income (loss) attributable to noncontrolling interest
1,015

 
(197
)
Comprehensive income attributable to LKQ stockholders
$
82,144

 
$
203,473


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




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
 
March 31,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
316,066

 
$
331,761

Receivables, net
1,353,491

 
1,154,083

Inventories
2,692,006

 
2,836,075

Prepaid expenses and other current assets
283,207

 
199,030

Total current assets
4,644,770

 
4,520,949

Property, plant and equipment, net
1,206,342

 
1,220,162

Operating lease assets, net
1,279,576

 

Intangible assets:
 
 
 
Goodwill
4,354,306

 
4,381,458

Other intangibles, net
889,609

 
928,752

Equity method investments
134,234

 
179,169

Other assets
157,073

 
162,912

Total assets
$
12,665,910

 
$
11,393,402

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
952,688

 
$
942,398

Accrued expenses:
 
 
 
Accrued payroll-related liabilities
143,026

 
172,005

Other accrued expenses
317,826

 
288,425

Refund liability
105,435

 
104,585

Other current liabilities
100,058

 
61,109

Current portion of operating lease liabilities
216,172

 

Current portion of long-term obligations
136,283

 
121,826

Total current liabilities
1,971,488

 
1,690,348

Long-term operating lease liabilities, excluding current portion
1,109,814

 

Long-term obligations, excluding current portion
4,092,766

 
4,188,674

Deferred income taxes
305,770

 
311,434

Other noncurrent liabilities
329,298

 
364,194

Commitments and contingencies

 


Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 318,888,569 shares issued and 313,973,538 shares outstanding at March 31, 2019; 318,417,821 shares issued and 316,146,114 shares outstanding at December 31, 2018
3,189

 
3,184

Additional paid-in capital
1,420,685

 
1,415,188

Retained earnings
3,696,924

 
3,598,876

Accumulated other comprehensive loss
(190,854
)
 
(174,950
)
Treasury stock, at cost; 4,915,031 shares at March 31, 2019 and 2,271,707 shares at December 31, 2018
(130,462
)
 
(60,000
)
Total Company stockholders' equity
4,799,482

 
4,782,298

Noncontrolling interest
57,292

 
56,454

Total stockholders' equity
4,856,774

 
4,838,752

Total liabilities and stockholders’ equity
$
12,665,910

 
$
11,393,402




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




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
 
Three Months Ended
 
March 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
99,063

 
$
152,763

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
76,207

 
61,066

Impairment of Mekonomen equity method investment
39,551

 

Impairment of net assets held for sale
15,023

 

Stock-based compensation expense
5,673

 
5,982

Other
(310
)
 
(3,134
)
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:
 
 
 
Receivables, net
(205,029
)
 
(130,520
)
Inventories
71,811

 
5,016

Prepaid income taxes/income taxes payable
42,917

 
37,362

Accounts payable
23,291

 
23,924

Other operating assets and liabilities
9,028

 
(7,296
)
Net cash provided by operating activities
177,225

 
145,163

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment
(53,016
)
 
(62,189
)
Acquisitions, net of cash acquired
(4,785
)
 
(2,966
)
Other investing activities, net
17

 
534

Net cash used in investing activities
(57,784
)
 
(64,621
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from exercise of stock options
1,334

 
2,255

Taxes paid related to net share settlements of stock-based compensation awards
(1,505
)
 
(3,292
)
Purchase of treasury stock
(70,462
)
 

Borrowings under revolving credit facilities
284,641

 
201,669

Repayments under revolving credit facilities
(312,339
)
 
(321,525
)
Repayments under term loans
(2,188
)
 
(4,405
)
Borrowings under receivables securitization facility
6,600

 

Repayments under receivables securitization facility
(36,910
)
 

(Repayments) borrowings of other debt, net
(625
)
 
4,409

Other financing activities, net
(1,277
)
 
3,383

Net cash used in financing activities
(132,731
)
 
(117,506
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(2,513
)
 
2,877

Net decrease in cash, cash equivalents and restricted cash
(15,803
)
 
(34,087
)
Cash, cash equivalents and restricted cash, beginning of period
337,250

 
279,766

Cash, cash equivalents and restricted cash, end of period
$
321,447

 
$
245,679

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash
 
 
 
Cash and cash equivalents
$
316,066

 
$
245,679

Restricted cash included in Other assets
5,381

 

Cash, cash equivalents and restricted cash, end of period
$
321,447

 
$
245,679

 
 
 
 
Supplemental disclosure of cash paid for:
 
 
 
Income taxes, net of refunds
$
11,775

 
$
15,464

Interest
14,462

 
13,975

Supplemental disclosure of noncash investing and financing activities:
 
 
 
Noncash property, plant and equipment additions
9,054

 
4,199

Other financing obligations, including debt assumed in connection with business acquisitions
8,424

 

Contingent consideration liabilities

 
34


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




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Stockholders’ Equity
(In thousands)
 
LKQ Stockholders
 
 
 
 
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive (Loss) Income
 
Noncontrolling Interest
 
Total Stockholders' Equity
 
Shares
 
Amount
 
Shares
 
Amount
BALANCE, January 1, 2019
318,418

 
$
3,184

 
(2,272
)
 
$
(60,000
)
 
$
1,415,188

 
$
3,598,876

 
$
(174,950
)
 
$
56,454

 
$
4,838,752

Net income

 

 

 

 

 
98,048

 

 
1,015

 
99,063

Other comprehensive loss

 

 

 

 

 

 
(15,904
)
 

 
(15,904
)
Purchase of treasury stock

 

 
(2,643
)
 
(70,462
)
 

 

 

 

 
(70,462
)
Vesting of restricted stock units, net of shares withheld for employee tax
303

 
3

 

 

 
(1,080
)
 

 

 

 
(1,077
)
Stock-based compensation expense

 

 

 

 
5,673

 

 

 

 
5,673

Exercise of stock options
183

 
2

 

 

 
1,332

 

 

 

 
1,334

Tax withholdings related to net share settlements of stock-based compensation awards
(15
)
 

 

 

 
(428
)
 

 

 

 
(428
)
Dividends declared to noncontrolling interest shareholder

 

 

 

 

 

 

 
(177
)
 
(177
)
BALANCE, March 31, 2019
318,889

 
$
3,189

 
(4,915
)
 
$
(130,462
)
 
$
1,420,685

 
$
3,696,924

 
$
(190,854
)
 
$
57,292

 
$
4,856,774


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 8)

 

 

 
(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 unaudited condensed consolidated financial statements.
7




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, 2018 filed with the SEC on March 1, 2019 ("2018 Form 10-K").
 
Note 2. Business Combinations
During the three months ended March 31, 2019, we completed two acquisitions of wholesale businesses in Europe. These acquisitions were not material to our results of operations or financial position as of and for the three months ended March 31, 2019. Total acquisition date fair value of the consideration for these acquisitions was $7 million, of which $5 million was cash paid (net of cash acquired). In addition, we assumed $7 million of existing debt as of the acquisition dates.
On May 30, 2018, we acquired Stahlgruber GmbH ("Stahlgruber"), a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories with operations in Germany, Austria, Italy, Slovenia, and Croatia, with further sales to Switzerland. Total acquisition date fair value of the consideration for our Stahlgruber acquisition was €1.2 billion ($1.4 billion), composed of €1.0 billion ($1.1 billion) of cash paid (net of cash acquired), and €215 million ($251 million) of newly issued shares of LKQ common stock. We financed the acquisition with the proceeds from €1.0 billion ($1.2 billion) of senior notes, the direct issuance to Stahlgruber's owner of 8,055,569 newly issued shares of LKQ common stock, and borrowings under our existing revolving credit facility. We recorded $913 million ($908 million in 2018 and $5 million of adjustments in the three months ended March 31, 2019) of goodwill related to our acquisition of Stahlgruber.
On May 3, 2018, the European Commission cleared the acquisition for the entire European Union, except with respect to the wholesale automotive parts business in the Czech Republic. The acquisition of the Czech Republic wholesale business has been referred to the Czech Republic competition authority for review. The Czech Republic wholesale business represents an immaterial portion of Stahlgruber's revenue and profitability.
In addition to our acquisition of Stahlgruber, during the year ended December 31, 2018, we completed acquisitions of four wholesale businesses in North America and nine wholesale businesses in Europe. Total acquisition date fair value of the consideration for these acquisitions was $99 million, composed of $85 million of cash paid (net of cash and restricted cash acquired), $11 million of notes payable, and $3 million for the estimated value of contingent payments to former owners (with maximum potential payments totaling $5 million). During the year ended December 31, 2018, we recorded $68 million of goodwill related to these acquisitions.
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, 2019 and the last nine months of the year ended December 31, 2018 are preliminary as we are in the process of determining the following: 1) valuation amounts for certain receivables, inventories and fixed assets acquired; 2) valuation amounts for certain intangible assets acquired; 3) the acquisition date fair value of certain liabilities assumed; and 4) the tax basis of the entities acquired. We have recorded preliminary estimates for certain of the items noted above and will record adjustments, if any, to the preliminary amounts upon finalization of the valuations.

8



During the first quarter of 2019, the measurement period adjustments recorded for acquisitions completed in prior periods were not material. The income statement effect of these measurement period adjustments that would have been recorded in previous reporting periods if the adjustments had been recognized as of the acquisition dates was immaterial.
The purchase price allocations for the acquisitions completed during the year ended December 31, 2018 are as follows (in thousands):
 
Year Ended
 
December 31, 2018
 
Stahlgruber
 
Other Acquisitions (1)
 
Total
Receivables
$
144,826

 
$
19,171

 
$
163,997

Receivable reserves
(2,818
)
 
(918
)
 
(3,736
)
Inventories
380,238

 
14,021

 
394,259

Prepaid expenses and other current assets
10,970

 
1,851

 
12,821

Property, plant and equipment
271,292

 
5,711

 
277,003

Goodwill
908,253

 
64,637

 
972,890

Other intangibles
285,255

 
35,159

 
320,414

Other assets
16,625

 
37

 
16,662

Deferred income taxes
(78,130
)
 
(5,285
)
 
(83,415
)
Current liabilities assumed
(346,788
)
 
(20,116
)
 
(366,904
)
Debt assumed
(79,925
)
 
(4,875
)
 
(84,800
)
Other noncurrent liabilities assumed (2)
(80,824
)
 
(10,306
)
 
(91,130
)
Noncontrolling interest
(44,110
)
 

 
(44,110
)
Contingent consideration liabilities

 
(3,107
)
 
(3,107
)
Other purchase price obligations
(6,084
)
 
3,623

 
(2,461
)
Stock issued
(251,334
)
 

 
(251,334
)
Notes issued

 
(11,347
)
 
(11,347
)
Gains on bargain purchases (3)

 
(2,418
)
 
(2,418
)
Settlement of other purchase price obligations (non-interest bearing)

 
1,711

 
1,711

Cash used in acquisitions, net of cash and restricted cash acquired
$
1,127,446

 
$
87,549

 
$
1,214,995

(1)
The amounts recorded during the year ended December 31, 2018 include a $5 million adjustment to increase other intangibles related to our acquisition of Warn Industries, Inc. ("Warn") in 2017 and $4 million of adjustments to reduce other purchase price obligations related to other 2017 acquisitions.
(2)
The amount recorded for our acquisition of Stahlgruber includes a $79 million liability for certain pension obligations.
(3)
The amounts recorded during the year ended December 31, 2018 are due to the gains on bargain purchases related to (i) an acquisition in Europe completed in the second quarter of 2017 as a result of changes in the acquisition date fair value of the consideration, and (ii) three acquisitions in Europe completed during 2018 as a result of changes to our estimates of the fair values of the net assets acquired.
The fair value of our intangible assets is based on a number of inputs, including projections of future cash flows, discount rates, assumed royalty rates and customer attrition rates, all of which are Level 3 inputs. We used the relief-from-royalty method to value trade names, trademarks, software and other technology assets, and we used the multi-period excess earnings method to value customer relationships. The relief-from-royalty method assumes that the intangible asset has value to the extent that its owner is relieved of the obligation to pay royalties for the benefits received from the intangible asset. The multi-period excess earnings method is based on the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset charges. The fair value of our property, plant and equipment is determined using inputs such as market comparables and current replacement or reproduction costs of the asset, adjusted for physical, functional and economic factors; these adjustments to arrive at fair value use unobservable inputs in which little or no market data exists, and therefore, these inputs are considered to be Level 3 inputs. See Note 11, "Fair Value Measurements" for further information regarding the tiers in the fair value hierarchy.

9



The acquisition of Stahlgruber expanded LKQ's geographic presence in continental Europe and serves as an additional strategic hub for our European operations. In addition, the acquisition of Stahlgruber allows for continued improvement in procurement, logistics and infrastructure optimization. The primary objectives of our other acquisitions made during the three months ended March 31, 2019 and the year ended December 31, 2018 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.
When we identify potential acquisitions, we attempt to target companies with a leading market presence, an experienced management team and workforce that provides a fit with our existing operations, and strong cash flows. For certain of our acquisitions, we have identified cost savings and synergies as a result of integrating the company with our existing business that provide additional value to the combined entity. In many cases, acquiring companies with these characteristics will result in purchase prices that include a significant amount of goodwill.
The following pro forma summary presents the effect of the businesses acquired during the three months ended March 31, 2019 as though the businesses had been acquired as of January 1, 2018, and the businesses acquired during the year ended December 31, 2018 as though they had been acquired as of January 1, 2017. 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,
 
2019
 
2018
Revenue, as reported
$
3,100,303

 
$
2,720,764

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

 
489,534

Other acquisitions
5,980

 
43,005

Pro forma revenue
$
3,106,283

 
$
3,253,303

 
 
 
 
Net income, as reported
$
99,063

 
$
152,763

Net income of purchased businesses for the period prior to acquisition, and pro forma purchase accounting adjustments:
 
 
 
Stahlgruber
3,074

 
1,273

Other acquisitions
330

 
334

Acquisition related expenses, net of tax (1)
224

 
1,526

Pro forma net income
102,691

 
155,896

Less: Net income (loss) attributable to noncontrolling interest, as reported
1,015

 
(197
)
Less: Pro forma net income attributable to noncontrolling interest

 
528

Pro forma net income attributable to LKQ stockholders
$
101,676

 
$
155,565

(1)
Includes expenses related to acquisitions closed in the period and excludes expenses for acquisitions not yet completed.
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 5, "Restructuring and Acquisition Related Expenses," for further information regarding our acquisition related expenses. These pro forma results are not necessarily indicative of what would have occurred if the acquisitions had been in effect for the periods presented or of future results.

Note 3. Financial Statement Information
Allowance for Doubtful Accounts
We have a reserve for uncollectible accounts, which was approximately $55 million and $57 million at March 31, 2019 and December 31, 2018, respectively.

10



Inventories
Inventories consist of the following (in thousands):
 
March 31,
 
December 31,
 
2019
 
2018
Aftermarket and refurbished products
$
2,229,681

 
$
2,309,458

Salvage and remanufactured products
437,463

 
503,199

Manufactured products
24,862

 
23,418

Total inventories (1)
$
2,692,006

 
$
2,836,075

(1)
During the first quarter of 2019, $62 million of inventory was classified as held for sale. Refer to the "Net Assets Held for Sale" section for further information.
Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of March 31, 2019, manufactured products inventory was composed of $17 million of raw materials, $2 million of work in process, and $6 million of finished goods. As of December 31, 2018, manufactured products inventory was composed of $17 million of raw materials, $2 million of work in process, and $4 million of finished goods.
Net Assets Held for Sale
During the first quarter of 2019, we committed to plans to sell certain businesses in our North America and Europe segments. As a result, these businesses were classified as net assets held for sale and were required to be adjusted to the lower of fair value less cost to sell or carrying value, resulting in total impairment charges of $15 million, which were recorded within Impairment of net assets held for sale in the Unaudited Condensed Consolidated Statement of Income. As of March 31, 2019, there were $88 million of assets held for sale, including $5 million of goodwill that was reclassified as held for sale related to our Europe segment, and $8 million of liabilities held for sale, which are recorded within Prepaid expenses and other current assets and Other current liabilities, respectively, on the Unaudited Condensed Consolidated Balance Sheet. We expect these businesses to be disposed of during the next twelve months. The businesses do not meet the requirements to be considered discontinued operations. These businesses generated annualized revenue of approximately $170 million during the twelve-month period ended March 31, 2019.
We are required to record net assets of our held for sale businesses at the lower of fair value less cost to sell or carrying value. Fair values were based on projected discounted cash flows and/or estimated selling prices. Management's assumptions for our discounted cash flow analysis of the businesses were based on projecting revenues and profits, tax rates, capital expenditures, working capital requirements and discount rates. For businesses for which we utilized estimated selling prices to calculate the fair value, factors included projected market multiples and any legitimate offers. Due to the uncertainties in the estimation process, it is possible that actual results could differ from the estimates used in the Company's historical analysis. The inputs utilized in the fair value estimates are classified as Level 3 within the fair value hierarchy. The fair values of the net assets were measured on a non-recurring basis as of March 31, 2019.
Investments in Unconsolidated Subsidiaries
Our investment in unconsolidated subsidiaries was $134 million and $179 million as of March 31, 2019 and December 31, 2018, respectively. On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen AB ("Mekonomen") for an aggregate purchase price of $181 million. In October 2018, we acquired an additional $48 million of equity in Mekonomen at a discounted share price as part of its rights issue, increasing our equity interest to 26.6%. We are accounting for our interest in Mekonomen using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over the investee. As of March 31, 2019, our share of the book value of Mekonomen's net assets exceeded the book value of our investment in Mekonomen by $5 million; this difference is primarily related to Mekonomen's Accumulated Other Comprehensive Income balance as of our acquisition date in 2016. We are recording our equity in the net earnings of Mekonomen on a one quarter lag. We recorded an equity loss of $40 million during the three months ended March 31, 2019, compared to equity in earnings of $2 million during the three months ended March 31, 2018 related to our investment in Mekonomen, including adjustments to convert the results to GAAP and to recognize the impact of our purchase accounting adjustments and the other-than-temporary impairment (three months ended March 31, 2019 only) described below. In May 2018, we received a cash dividend of $8 million (SEK 67 million) related to our investment in Mekonomen. Mekonomen announced in February 2019 that the Mekonomen Board of Directors has proposed no dividend payment in 2019.
We evaluated our investment in Mekonomen for other-than-temporary impairment as of March 31, 2019, and concluded the decline in fair value was other-than-temporary due to a significant stock price decrease since December 31,

11



2018, the last date at which we recognized an other-than-temporary impairment charge related to our investment. Therefore, we recognized an other-than-temporary impairment of $40 million, which represented the difference in the carrying value and the fair value of our investment in Mekonomen. The fair value of our investment in Mekonomen was determined using the Mekonomen share price of SEK 65 as of March 31, 2019. The impairment charge is recorded in Equity in (losses) earnings of unconsolidated subsidiaries on our Unaudited Condensed Consolidated Statements of Income. Equity in losses and earnings from our investment in Mekonomen are reported in the Europe segment. As a result of the impairment charge, the Level 1 fair value of our equity investment in the publicly traded Mekonomen common stock at March 31, 2019 approximated the carrying value of $110 million.
Warranty Reserve
Some of our salvage mechanical products are sold with a standard six month warranty against defects. Additionally, some of our remanufactured engines are sold with a standard three year warranty against defects. We also provide a limited lifetime warranty for certain of our aftermarket products. These assurance-type warranties are not considered a separate performance obligation, and thus no transaction price is allocated to them. We record the warranty costs in Cost of goods sold on our Unaudited Condensed Consolidated Statements of Income. Our warranty reserve is calculated using historical claim information to project future warranty claims activity and is recorded within Other accrued expenses and Other noncurrent liabilities on our Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments.
The changes in the warranty reserve are as follows (in thousands):
Balance as of December 31, 2018
$
23,262

Warranty expense
14,202

Warranty claims
(12,499
)
Balance as of March 31, 2019
$
24,965

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.
Treasury Stock    
On October 25, 2018, our Board of Directors authorized a stock repurchase program under which we may purchase up to $500 million of our common stock from time to time through October 25, 2021. Repurchases under the program may be made in the open market or in privately negotiated transactions, with the amount and timing of repurchases depending on market conditions and corporate needs. The repurchase program does not obligate us to acquire any specific number of shares and may be suspended or discontinued at any time. Delaware law imposes restrictions on stock repurchases. During the three months ended March 31, 2019, we repurchased 2.6 million shares of common stock for an aggregate price of $70 million. During 2018, we repurchased 2.3 million shares of common stock for an aggregate price of $60 million. As of March 31, 2019, there is $370 million of remaining capacity under our repurchase program. Repurchased shares are accounted for as treasury stock using the cost method.
Recent Accounting Pronouncements
Adoption of New Lease Standard
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2016-02, "Leases" ("ASU 2016-02"), which represents the FASB Accounting Standard Codification Topic 842 ("ASC 842"), to increase transparency and comparability by recognizing lease assets and lease liabilities on the Unaudited Condensed Consolidated Balance Sheets and disclosing key information about leasing arrangements. The main difference between the prior standard and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under the prior standard.
We adopted the standard in the first quarter of 2019 using the modified retrospective approach and took advantage of the transition package of practical expedients permitted within the new standard, which, among other things, allows us to carryforward the historical lease classification. For leases with a term of 12 months or less, we elected the short-term lease exemption, which allowed us to not recognize right-of-use assets or lease liabilities for qualifying leases existing at transition and new leases we may enter into in the future. Additionally, we adopted the practical expedient to combine lease and non-lease components.

12



As of January 1, 2019, we recorded both an operating lease asset and operating lease liability of $1.3 billion. The preexisting deferred rent liability balances from the historical straight-line treatment of operating leases was reclassified as a reduction of the lease asset upon adoption. The adoption of the standard did not materially affect our Unaudited Condensed Consolidated Statements of Income or Statements of Cash Flows as operating lease payments will still be an operating cash outflow and capital lease payments will still be a financing cash outflow. The new standard did not have a material impact on our liquidity. The standard will have no impact on our debt covenant compliance under our current agreements as the covenant calculations are based on the prior lease accounting rules.
Other Recently Adopted Accounting Pronouncements
During the first quarter of 2019, we adopted 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. We adopted the provisions of ASU 2017-12 by applying a modified retrospective approach to existing hedging relationships as of the adoption date. The adoption of ASU 2017-12 did not have a material impact on our unaudited condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-13, "Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"), which removes, modifies, and adds certain disclosure requirements in ASC 820. ASU 2018-13 is effective for fiscal years and interim periods beginning after December 15, 2019; early adoption is permitted. We are in the process of evaluating the impact of this standard on our disclosures but do not believe that it will have a material impact.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), and in November 2018 issued a subsequent amendment, ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses" ("ASU 2018-19"). ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. ASU 2018-19 will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope of this amendment that represent the contractual right to receive cash. ASU 2016-13 and ASU 2018-19 should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
  

13



Note 4. Revenue Recognition
The majority of our revenue is derived from the sale of vehicle parts. We recognize revenue when the products are shipped to, delivered to or picked up by customers, which is the point when title has transferred and risk of ownership has passed.
Sources of Revenue
We report our revenue in two categories: (i) parts and services and (ii) other. The following table sets forth our revenue by category, with our parts and services revenue further disaggregated by reportable segment (in thousands):
 
Three Months Ended
 
March 31,
 
2019
 
2018
North America
$
1,155,698

 
$
1,172,585

Europe
1,440,841

 
1,037,046

Specialty
352,556

 
350,674

Parts and services
2,949,095

 
2,560,305

Other
151,208

 
160,459

Total revenue
$
3,100,303

 
$
2,720,764

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 billed 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, and fenders; bumper covers; head and tail lamps; automotive glass products such as windshields; mirrors and grilles; wheels; and large mechanical items such as engines and transmissions. In Europe, our products include a wide variety of small mechanical products such as brake pads, discs and sensors; clutches; electrical products such as spark plugs and batteries; steering and suspension products; filters; and oil and automotive fluids. In our Specialty operations, we serve six product segments: truck and off-road; speed and performance; RV; towing; wheels, tires and performance handling; and miscellaneous accessories. 
Our service-type warranties typically have service periods ranging from 6 months to 36 months. Under 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 as of January 1, 2019
$
24,006

Additional warranty revenue deferred
10,875

Warranty revenue recognized
(9,370
)
Balance as of March 31, 2019
$
25,511

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 original equipment manufacturers ("OEMs") and other entities that contract with us for secure disposal of "crush only" vehicles. The sale of hulks in our wholesale and self service recycling operations represents one performance obligation, and revenue is recognized based on a price per weight when the customer (processor) collects the scrap. Some adjustments may occur when the customer weighs the scrap at their location, and revenue is adjusted accordingly.
Revenue by Geographic Area
See Note 15, "Segment and Geographic Information" for information related to our revenue by geographic region.
Variable Consideration

14



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, with contemplation of any expected reversals in revenue. As of both March 31, 2019 and December 31, 2018, we recorded a refund liability and return asset for expected returns of $105 million and $56 million, respectively. The refund liability is presented separately on the balance sheet within current liabilities while the return asset is presented within prepaid expenses and other current assets. Other types of variable consideration consist primarily of discounts, volume rebates, and other customer sales incentives which are recorded in Receivables, net on the Unaudited Condensed Consolidated Balance Sheets. We recorded a reserve for our variable consideration of $66 million and $103 million as of March 31, 2019 and December 31, 2018, respectively. While other customer incentive programs exist, we characterize them as material rights in the context of our sales transactions. We consider these programs to be immaterial to our unaudited condensed consolidated financial statements.

Note 5. Restructuring and Acquisition Related Expenses
Acquisition Related Expenses
Acquisition related expenses, which include external costs such as legal, accounting and advisory fees, were immaterial for the three months ended March 31, 2019, and were $2 million for the three months ended March 31, 2018. Acquisition related expenses for the three months ended March 31, 2019 consisted of external costs related to completed acquisitions and pending acquisitions as of March 31, 2019.
Acquisition related expenses for the three months ended March 31, 2018 included $1 million of costs related to our acquisition of Stahlgruber. The remaining acquisition related costs for the three months ended March 31, 2018 consisted of external costs related to (i) other completed acquisitions, (ii) acquisitions that were pending as of March 31, 2018, and (iii) potential acquisitions that were terminated.
Acquisition Integration Plans and Restructuring
During the three months ended March 31, 2019 and 2018, we incurred $3 million and $2 million of restructuring expenses, respectively. Restructuring expenses incurred during each of the three months ended March 31, 2019 and 2018 included $2 million related to the integration of our acquisition of Andrew Page Limited ("Andrew Page").
We expect to incur additional expenses related to the integration of certain of our acquisitions into our existing operations. These integration activities are expected to include the closure of duplicate facilities, rationalization of personnel in connection with the consolidation of overlapping facilities with our existing business, and moving expenses. Future expenses to complete these integration plans are expected to be approximately $20 million.

Note 6. Stock-Based Compensation
In order to attract and retain employees, non-employee directors, consultants, and other persons associated with us, we may grant qualified and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares and performance units under the LKQ Corporation 1998 Equity Incentive Plan (the “Equity Incentive Plan”). We have granted RSUs, stock options, and restricted stock under the Equity Incentive Plan. We expect to issue new or treasury shares of common stock to cover past and future equity grants.
RSUs
The RSUs we have issued vest over periods of up to five years, subject to a continued service condition. Currently outstanding RSUs (other than PSUs, which are described below) contain either a time-based vesting condition or a combination of a performance-based vesting condition and a time-based vesting condition, in which case both conditions must be met before any RSUs vest. For most of the RSUs containing a performance-based vesting condition, the Company must report positive diluted earnings per share, subject to certain adjustments, during any fiscal year period within five years following the grant date; we have an immaterial amount of RSUs containing other performance-based vesting conditions. Each RSU converts into one share of LKQ common stock on the applicable vesting date. The grant date fair value of RSUs is based on the market price of LKQ stock on the grant date. Our 2019 annual grant of RSUs occurred on March 1, 2019; in previous years, the annual grant occurred in mid-January.
Starting with our 2019 grants, participants who are eligible for retirement (defined as a voluntary separation of service from the Company after the participant has attained at least 60 years of age and completed at least five years of service) will continue to vest in their awards; if retirement occurs during the first year of the vesting period (for RSUs subject to a time-based vesting condition) or the first year of the performance period (for RSUs with a performance-based vesting condition), the

15



participant vests in a prorated amount of the RSU grant based on the portion of the year employed. For our RSU grants in 2018 and prior, participants forfeit their unvested shares upon retirement.
The fair value of RSUs that vested during the three months ended March 31, 2019 was $9 million; the fair value of RSUs vested is based on the market price of LKQ stock on the date vested.
The following table summarizes activity related to our RSUs under the Equity Incentive Plan for the three months ended March 31, 2019:
 
Number
Outstanding
 
Weighted
Average
Grant Date
Fair Value
 
Weighted Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
   (in thousands) (1)
Unvested as of January 1, 2019
1,475,682

 
$
34.94

 
 
 
 
Granted 
832,974

 
$
27.69

 
 
 
 
Vested
(343,552
)
 
$
33.47

 
 
 
 
Forfeited / Canceled
(15,499
)
 
$
34.01

 
 
 
 
Unvested as of March 31, 2019
1,949,605

 
$
32.11

 
 
 
 
Expected to vest after March 31, 2019
1,737,948

 
$
32.12

 
3.1
 
$
49,323

(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.

On March 1, 2019, we granted performance-based three-year RSUs ("PSUs") to certain employees, including our executive officers, as part of our cash incentive plan ("CIP"). As these awards are performance-based, the exact number of shares to be paid out may be up to twice the grant amount, depending on the Company's performance and the achievement of certain performance metrics (adjusted earnings per share, average organic parts and services revenue growth, and average return on invested capital) over the three year period ending December 31, 2021.
The following table summarizes activity related to our PSUs under the Equity Incentive Plan for the three months ended March 31, 2019:
 
Number
Outstanding
 
Weighted
Average
Grant Date
Fair Value
 
Weighted Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
   (in thousands) (1)
Unvested as of January 1, 2019

 
$

 
 
 
 
Granted  (2)
116,094

 
$
27.69

 
 
 
 
Unvested as of March 31, 2019
116,094

 
$
27.69

 
 
 
 
Expected to vest after March 31, 2019
116,094

 
$
27.69

 
2.8
 
$
3,295

(1)
The aggregate intrinsic value of expected to vest PSUs represents the total pretax intrinsic value (the fair value of the Company's stock on the last day of each period multiplied by the number of units at target) that would have been received by the holders had all PSUs vested. This amount changes based on the market price of the Company’s common stock and the achievement of the performance metrics relative to the established targets.
(2)
Represents the number of PSUs at target payout.

16



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, 2019. No options vested during the three months ended March 31, 2019; all of our outstanding options are fully vested.
The following table summarizes activity related to our stock options under the Equity Incentive Plan for the three months ended March 31, 2019:
 
Number
Outstanding
 
Weighted
Average Exercise Price
 
Weighted Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
   (in thousands) (1)
Balance as of January 1, 2019
1,051,494

 
$
10.15

 
 
 
 
Exercised
(182,541
)
 
$
7.31

 
 
 
$
3,274

Canceled
(6,528
)
 
$
15.21

 
 
 
 
Balance as of March 31, 2019
862,425

 
$
10.72

 
0.7
 
$
15,362

Exercisable as of March 31, 2019
862,425

 
$
10.72

 
0.7
 
$
15,362

(1)
The aggregate intrinsic value of outstanding and exercisable options represents the total pretax intrinsic value (the difference between the fair value of the Company's stock on the last day of each period and the exercise price, multiplied by the number of options where the fair value exceeds the exercise price) that would have been received by the option holders had all option holders exercised their options as of the last day of the period indicated. This amount changes based on the market price of the Company’s common stock.
Stock-Based Compensation Expense
Pre-tax stock-based compensation expense for RSUs and PSUs totaled $6 million for each of the three months ended March 31, 2019 and 2018. As of March 31, 2019, unrecognized compensation expense related to unvested RSUs and PSUs was $55 million. Stock-based compensation expense related to these awards will be different to the extent that forfeitures are realized and performance under the PSUs differs from target.

Note 7. Earnings Per Share
The following chart sets forth the computation of earnings per share (in thousands, except per share amounts):
 
Three Months Ended
 
March 31,
 
2019
 
2018
Net income
$
99,063

 
$
152,763

Denominator for basic earnings per share—Weighted-average shares outstanding
315,046

 
309,517

Effect of dilutive securities:
 
 
 
RSUs
414

 
619

PSUs

 

Stock options
558

 
1,211

Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding
316,018

 
311,347

Earnings per share, basic
$
0.31

 
$
0.49

Earnings per share, diluted
$
0.31

 
$
0.49


17



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, 2019 and 2018 (in thousands):
 
Three Months Ended
 
March 31,
 
2019
 
2018
Antidilutive securities:
 
 
 
RSUs
599

 

Stock options
32

 



18



Note 8. Accumulated Other Comprehensive Income (Loss)
The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands):
 
 
Three Months Ended
 
 
March 31, 2019
 
 
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
 
$
(177,597
)
 
$
14,374

 
$
(8,075
)
 
$
(3,652
)
 
$
(174,950
)
Pretax (loss) income
 
(9,895
)
 
15,593

 

 

 
5,698

Income tax effect
 

 
(3,654
)
 

 

 
(3,654
)
Reclassification of unrealized (gain) loss
 

 
(19,188
)
 
253

 

 
(18,935
)
Reclassification of deferred income taxes
 

 
4,512

 
(62
)
 

 
4,450

Other comprehensive loss from unconsolidated subsidiaries
 

 

 

 
(3,463
)
 
(3,463
)
Ending balance
 
$
(187,492
)
 
$
11,637

 
$
(7,884
)
 
$
(7,115
)
 
$
(190,854
)

 
 
Three Months Ended
 
 
March 31, 2018
 
 
Foreign
Currency
Translation
 
Unrealized Gain (Loss)
on Cash Flow Hedges
 
Unrealized (Loss) Gain
on Pension Plans
 
Other Comprehensive Loss from Unconsolidated Subsidiaries
 
Accumulated
Other
Comprehensive
(Loss) Income
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
)
Net unrealized gains on our interest rate swaps, inclusive of our interest rate swap agreements and the interest rate swap component of our cross currency swaps, totaling $2 million were reclassified to Interest expense, net of interest income in our Unaudited Condensed Consolidated Statements of Income during each of the three months ended March 31, 2019 and 2018. We also reclassified gains of $4 million and $1 million to Interest expense, net of interest income related to the foreign currency forward component of our cross currency swaps during the three months ended March 31, 2019 and 2018, respectively. Also related to our cross currency swaps, we reclassified gains of $13 million and losses of $12 million to Other income, net in our Unaudited Condensed Consolidated Statements of Income during the three months ended March 31, 2019 and 2018, respectively; these gains and losses offset the impact of the remeasurement of the underlying contracts. Net unrealized losses related to our pension plans were reclassified to Other income, net in our Unaudited Condensed Consolidated Statements of Income during the three months ended March 31, 2019. Our policy is to reclassify the income tax effect from Accumulated other comprehensive income (loss) to the Provision for income taxes when the related gains and losses are released to the Unaudited Condensed Consolidated Statements of Income.
During the first quarter of 2018, we adopted ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"), which allowed a reclassification from Accumulated other comprehensive income (loss) to Retained earnings for stranded tax effects resulting from the reduction of the U.S. federal statutory income tax rate to 21% from 35% due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). As a result of the adoption of ASU 2018-02 in the first quarter of 2018, we recorded a $5 million reclassification to increase Accumulated other comprehensive income (loss) and decrease Retained earnings.


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Note 9. Long-Term Obligations
Long-term obligations consist of the following (in thousands):
 
March 31,
 
December 31,
 
2019
 
2018
Senior secured credit agreement:
 
 
 
Term loans payable
$
347,813

 
$
350,000

Revolving credit facilities
1,363,544

 
1,387,177

U.S. Notes (2023)
600,000

 
600,000

Euro Notes (2024)
560,900

 
573,350

Euro Notes (2026/28)
1,121,800

 
1,146,700

Receivables securitization facility
79,690

 
110,000

Notes payable through October 2030 at weighted average interest rates of 2.1% and 2.0%, respectively
21,701

 
23,056

Finance lease obligations
42,160

 
39,966

Other long-term debt at weighted average interest rate of 1.9% and 1.8%, respectively
126,540

 
117,448

Total debt
4,264,148

 
4,347,697

Less: long-term debt issuance costs
(34,810
)
 
(36,906
)
Less: current debt issuance costs
(289
)
 
(291
)
Total debt, net of debt issuance costs
4,229,049

 
4,310,500

Less: current maturities, net of debt issuance costs
(136,283
)
 
(121,826
)
Long term debt, net of debt issuance costs
$
4,092,766

 
$
4,188,674

Senior Secured Credit Agreement
On November 20, 2018, LKQ Corporation, LKQ Delaware LLP, and certain other subsidiaries (collectively, the "Borrowers") entered into Amendment No. 3 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) increase the total availability under the revolving credit facility's multicurrency component from $2.75 billion to $3.15 billion; (2) reduce the margin on borrowings by 25 basis points at the September 30, 2018 leverage ratio, and reduce the number of leverage pricing tiers; (3) extend the maturity date by one year to January 29, 2024; (4) reduce the unused facility fee depending on leverage category; (5) increase the capacity for incurring additional indebtedness under our receivables securitization facility; (6) increase the maximum borrowing limit of swingline loans and add the ability to borrow in British Pounds and Euros; and (7) make other immaterial or clarifying modifications and amendments to the terms of the Credit Agreement. Borrowings will continue to bear interest at variable rates.
Amounts under the revolving credit facility are due and payable upon maturity of the Credit Agreement on January 29, 2024. Term loan borrowings, which totaled $348 million as of March 31, 2019, are due and payable in quarterly installments equal to $2 million on the last day of each of the first four fiscal quarters ending on or after March 31, 2019 and approximately $4 million on the last day of each fiscal quarter thereafter, with the remaining balance due and payable on January 29, 2024.
The increase in the revolving credit facility's multicurrency component of $400 million was used in part to pay down $240 million of the term loan (to the new $350 million amount that was outstanding as of the date of the amendment); the remainder will be used for general corporate purposes.
We are required to prepay the term loan by amounts equal to proceeds from the sale or disposition of certain assets if the proceeds are not reinvested within twelve months. We also have the option to prepay outstanding amounts under the Credit Agreement without penalty.
The Credit Agreement contains customary representations and warranties and customary covenants that provide limitations and conditions on our ability to enter into certain transactions. The Credit Agreement also contains financial and affirmative covenants, including limitations on our net leverage ratio and a minimum interest coverage ratio.
Borrowings under the Credit Agreement bear interest at variable rates, which depend on the currency and duration of the borrowing elected, plus an applicable margin. The applicable margin is subject to change in increments of 0.25% depending on our net leverage ratio. Interest payments are due on the last day of the selected interest period or quarterly in arrears depending on the type of borrowing. Including the effect of the interest rate swap agreements described in Note 10, "Derivative

20



Instruments and Hedging Activities," the weighted average interest rates on borrowings outstanding under the Credit Agreement at March 31, 2019 and December 31, 2018 were 1.8% and 1.9%, respectively. We also pay a commitment fee based on the average daily unused amount of the revolving credit facilities. The commitment fee is subject to change in increments of 0.05% depending on our net leverage ratio. In addition, we pay a participation commission on outstanding letters of credit at an applicable rate based on our net leverage ratio, and a fronting fee of 0.125% to the issuing bank, which are due quarterly in arrears.
Of the total borrowings outstanding under the Credit Agreement, there were $11 million classified as current maturities at March 31, 2019 compared to $9 million at December 31, 2018. As of March 31, 2019, 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, 2019 was $1.7 billion.
Related to the execution of Amendment No. 3 to the Fourth Amended and Restated Credit Agreement in November 2018, we incurred $4 million of fees, the majority of which were capitalized as an offset to Long-Term Obligations and are amortized over the term of the agreement.
U.S. Notes (2023)
In 2013, we issued $600 million aggregate principal amount of 4.75% senior notes due 2023 (the "U.S. Notes (2023)"). The U.S. Notes (2023) are governed by the Indenture dated as of May 9, 2013 (the "U.S. Notes (2023) Indenture") among LKQ Corporation, certain of our subsidiaries (the "Guarantors"), the trustee, paying agent, transfer agent and registrar. The U.S. Notes (2023) are registered under the Securities Act of 1933.
The U.S. Notes (2023) bear interest at a rate of 4.75% per year from the most recent payment date on which interest has been paid or provided for. Interest on the U.S. Notes (2023) is payable in arrears on May 15 and November 15 of each year. The U.S. Notes (2023) are fully and unconditionally guaranteed, jointly and severally, by the Guarantors.
The U.S. Notes (2023) and the related guarantees are, respectively, LKQ Corporation's and each Guarantor's senior unsecured obligations and are subordinated to all of the Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the U.S. Notes (2023) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the U.S. Notes (2023) to the extent of the assets of those subsidiaries.
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 Euronext Dublin.
Euro Notes (2026/28)
On April 9, 2018, LKQ European Holdings B.V. ("LKQ Euro Holdings"), a wholly-owned subsidiary of LKQ Corporation, completed an offering of €1.0 billion aggregate principal amount of senior notes. The offering consisted of €750 million senior notes due 2026 (the "2026 notes") and €250 million senior notes due 2028 (the "2028 notes" and, together with the 2026 notes, the "Euro Notes (2026/28)") in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering, together with borrowings under our senior secured credit facility, were or will be used to (i) finance a portion of the consideration paid for the Stahlgruber acquisition, (ii) for general corporate

21



purposes and (iii) to pay related fees and expenses, including the refinancing of net financial debt. The Euro Notes (2026/28) are governed by the Indenture dated as of April 9, 2018 (the “Euro Notes (2026/28) Indenture”) among LKQ Euro Holdings, LKQ Corporation and certain of our subsidiaries (the “Euro Notes (2026/28) Subsidiaries”), the trustee, paying agent, transfer agent, and registrar.
The 2026 notes and 2028 notes bear interest at a rate of 3.625% and 4.125%, respectively, per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for. Interest on the Euro Notes (2026/28) is payable in arrears on April 1 and October 1 of each year, beginning on October 1, 2018. The Euro Notes (2026/28) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2026/28) Subsidiaries (the "Euro Notes (2026/28) Guarantors").
The Euro Notes (2026/28) and the related guarantees are, respectively, LKQ Euro Holdings' and each Euro Notes (2026/28) Guarantor’s senior unsecured obligations and will be subordinated to all of LKQ Euro Holdings' and the Euro Notes (2026/28) Guarantors’ existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2026/28) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2026/28) to the extent of the assets of those subsidiaries. The Euro Notes (2026/28) have been listed on the Global Exchange Market of Euronext Dublin.
Related to the execution of the Euro Notes (2026/28) in April 2018, we incurred $16 million of fees, which were capitalized as an offset to Long-Term Obligations and are amortized over the term of the Euro Notes (2026/28).
Receivables Securitization Facility
On December 20, 2018, we amended the terms of our receivables securitization facility with MUFG Bank, Ltd. ("MUFG") (formerly known as The Bank of Tokyo-Mitsubishi UFJ, Ltd.) to: (i) extend the term of the facility to November 8, 2021; (ii) increase the maximum amount available to $110 million; and (iii) make other clarifying and updating changes. Under the facility, LKQ sells an ownership interest in certain receivables, related collections and security interests to MUFG for the benefit of conduit investors and/or financial institutions for cash proceeds. Upon payment of the receivables by customers, rather than remitting to MUFG the amounts collected, LKQ retains such collections as proceeds for the sale of new receivables generated by certain of the ongoing operations of the Company.
The sale of the ownership interest in the receivables is accounted for as a secured borrowing in our Unaudited Condensed Consolidated Balance Sheets, under which the receivables included in the program collateralize the amounts invested by MUFG, the conduit investors and/or financial institutions (the "Purchasers"). The receivables are held by LKQ Receivables Finance Company, LLC ("LRFC"), a wholly owned bankruptcy-remote special purpose subsidiary of LKQ, and therefore, the receivables are available first to satisfy the creditors of LRFC, including the Purchasers. Net receivables totaling $142 million and $132 million were collateral for the investment under the receivables facility as of March 31, 2019 and December 31, 2018, respectively.
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) 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, 2019, the interest rate under the receivables facility was based on commercial paper rates and was 3.4%. The outstanding balances of $80 million and $110 million as of March 31, 2019 and December 31, 2018, respectively, were classified as long-term on the Unaudited Condensed Consolidated Balance Sheets because we have the ability and intent to refinance these borrowings on a long-term basis.

Note 10. Derivative Instruments and Hedging Activities
We are exposed to market risks, including the effect of changes in interest rates, foreign currency exchange rates and commodity prices. Under our current policies, we use derivatives to manage our exposure to variable interest rates on our senior secured debt and changing foreign exchange rates for certain foreign currency denominated transactions. We do not hold or issue derivatives for trading purposes.
Cash Flow Hedges
We hold interest rate swap agreements to hedge a portion of the variable interest rate risk on our variable rate borrowings under our Credit Agreement, with the objective of minimizing the impact of interest rate fluctuations and stabilizing cash flows. Under the terms of the interest rate swap agreements, we pay the fixed interest rate and receive payment at a variable rate of interest based on LIBOR for the respective currency of each interest rate swap agreement’s notional

22



amount. Changes in the fair value of the interest rate swap agreements are recorded in Accumulated Other Comprehensive Income (Loss) and are reclassified to interest expense when the underlying interest payment has an impact on earnings. Our interest rate swap contracts have maturity dates ranging from January to June 2021. In December 2018, we sold two interest rate swap contracts with a notional amount of $110 million.
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. Changes in the fair value of the foreign currency forward contracts are 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 changes in the fair value of the derivative instruments are recorded in Accumulated Other Comprehensive Income (Loss) and are reclassified to interest expense, net of interest income when the underlying transactions have an impact on earnings.
In October 2018, we entered into two cross currency swap agreements for a total notional amount of $184 million (€160 million). Half of the notional amount matures in October 2019 with the remainder in October 2020. The purpose and accounting of the swaps are similar to those described in the previous paragraph.
The activity related to our cash flow hedges is presented in operating activities in our Unaudited Condensed Consolidated Statements of Cash Flows.
The following tables summarize the notional amounts and fair values of our designated cash flow hedges as of March 31, 2019 and December 31, 2018 (in thousands):
 
 
Notional Amount
 
Fair Value at March 31, 2019 (USD)
 
 
March 31, 2019
 
Other Current Assets
 
Other Assets
 
Other Accrued Expenses
 
Other Noncurrent Liabilities
Interest rate swap agreements
 
 
 
 
 
 
 
 
USD denominated
 
$
480,000

 
$

 
$
11,350

 
$

 
$

Cross currency swap agreements
 
 
 
 
 
 
 
 
USD/euro
 
$
570,349

 
2,242

 
7,669

 
144

 
29,442

Total cash flow hedges
 
$
2,242

 
$
19,019

 
$
144

 
$
29,442


 
 
Notional Amount
 
Fair Value at December 31, 2018 (USD)
 
 
December 31, 2018
 
Other Current Assets
 
Other Assets
 
Other Accrued Expenses
 
Other Noncurrent Liabilities
Interest rate swap agreements
 
 
 
 
 
 
 
 
USD denominated
 
$
480,000

 
$

 
$
14,967

 
$

 
$

Cross currency swap agreements
 
 
 
 
 
 
 
 
USD/euro
 
$
574,315

 
211

 
7,669

 
127

 
40,870

Total cash flow hedges
 
$
211

 
$
22,636

 
$
127

 
$
40,870

While certain derivative instruments executed with the same counterparty are subject to master netting arrangements, we present our cash flow hedge derivative instruments on a gross basis 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 $12 million and $14 million at March 31, 2019 and December 31, 2018, respectively.

23



The activity related to our cash flow hedges is included in Note 8, "Accumulated Other Comprehensive Income (Loss)." As of March 31, 2019, we estimate that $4 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, 2019 and December 31, 2018, along with the effect on our results of operations during the three months ended March 31, 2019 and 2018, were immaterial.

Note 11. Fair Value Measurements
Financial Assets and Liabilities Measured at Fair Value
We use the market and income approaches to estimate the fair value of our financial assets and liabilities, and during the three months ended March 31, 2019, there were no significant changes in valuation techniques or inputs related to the financial assets or liabilities that we have historically recorded at fair value. The tiers in the fair value hierarchy include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation inputs we utilized to determine such fair value as of March 31, 2019 and December 31, 2018 (in thousands):
 
Balance as of March 31, 2019
 
Fair Value Measurements as of March 31, 2019
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Cash surrender value of life insurance
$
53,316

 
$

 
$
53,316

 
$

Interest rate swaps
11,350

 

 
11,350

 

Cross currency swap agreements
9,911

 

 
9,911

 

Total Assets
$
74,577

 
$

 
$
74,577

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liabilities
$
5,274

 
$

 
$

 
$
5,274

Deferred compensation liabilities
56,493

 

 
56,493

 

Cross currency swap agreements
29,586

 

 
29,586

 

Total Liabilities
$
91,353

 
$

 
$
86,079

 
$
5,274

 
Balance as of December 31, 2018
 
Fair Value Measurements as of December 31, 2018
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Cash surrender value of life insurance
$
47,649

 
$

 
$
47,649

 
$

Interest rate swaps
14,967

 

 
14,967

 

Cross currency swap agreements
7,880

 

 
7,880

 

Total Assets
$
70,496

 
$

 
$
70,496

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liabilities
$
5,209

 
$

 
$

 
$
5,209

Deferred compensation liabilities
48,984

 

 
48,984

 

Cross currency swap agreements
40,997

 

 
40,997

 

Total Liabilities
$
95,190

 
$

 
$
89,981

 
$
5,209


24



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 10, "Derivative Instruments and Hedging Activities."
Our Level 2 assets and liabilities are valued using inputs from third parties and market observable data. We obtain valuation data for the cash surrender value of life insurance and deferred compensation liabilities from third party sources, which determine the net asset values for our accounts using quoted market prices, investment allocations and reportable trades. We value our other derivative instruments using a third party valuation model that performs a discounted cash flow analysis based on the terms of the contracts and market observable inputs such as current and forward interest rates and current and forward foreign exchange rates.
Our contingent consideration liabilities are related to our business acquisitions. Under the terms of the contingent consideration agreements, payments may be made at specified future dates depending on the performance of the acquired business subsequent to the acquisition. The liabilities for these payments are classified as Level 3 liabilities because the related fair value measurement, which is determined using an income approach, includes significant inputs not observable in the market.
Financial Assets and Liabilities Not Measured at Fair Value
Our debt is reflected on the Unaudited Condensed Consolidated Balance Sheets at cost. Based on market conditions as of both March 31, 2019 and December 31, 2018, the fair value of our credit agreement borrowings reasonably approximated the carrying value of $1.7 billion. In addition, based on market conditions, the fair values of the outstanding borrowings under the receivables facility reasonably approximated the carrying values of $80 million and $110 million at March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019 and December 31, 2018, the fair values of the U.S. Notes (2023) were approximately $603 million and $574 million, respectively, compared to a carrying value of $600 million at each date. As of March 31, 2019 and December 31, 2018, the fair values of the Euro Notes (2024) were approximately $599 million and $586 million compared to carrying values of $561 million and $573 million, respectively. As of March 31, 2019, the fair value of the Euro Notes (2026/28) was $1.2 billion compared to a carrying value of $1.1 billion; as of December 31, 2018, the fair value of the Euro Notes (2026/28) approximated the carrying value of $1.1 billion.
The fair value measurements of the borrowings under our credit agreement and receivables facility are classified as Level 2 within the fair value hierarchy since they are determined based upon significant inputs observable in the market, including interest rates on recent financing transactions with similar terms and maturities. We estimated the fair value by calculating the upfront cash payment a market participant would require at March 31, 2019 to assume these obligations. The fair value of our U.S. Notes (2023) is classified as Level 1 within the fair value hierarchy since it is determined based upon observable market inputs including quoted market prices in an active market. The fair values of our Euro Notes (2024) and Euro Notes (2026/28) are determined based upon observable market inputs including quoted market prices in markets that are not active, and therefore are classified as Level 2 within the fair value hierarchy.


25



Note 12. Leases
We lease certain warehouses, distribution centers, retail stores, office space, land, vehicles and equipment.
We determine if an arrangement is a lease at inception. Operating lease right-of-use ("ROU") assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As the implicit rate for most of our leases is not readily determinable, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Upon adoption of the new lease standard, we utilized the incremental borrowing rate as of the date of adoption. We determine our incremental borrowing rate by analyzing yield curves with consideration of lease term, and country and company specific factors. The operating lease ROU asset also includes any lease prepayments and excludes lease incentives.
Many of our leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 40 years or more. Our lease terms assumed in our measurement of the ROU assets and lease liabilities may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Some of our lease agreements include rental payments adjusted periodically for inflation. Most of these adjustments are considered variable lease costs. Other variable lease costs consist of certain non-lease components that are disclosed as lease costs due to our election of the practical expedient to combine lease and non-lease components and include items such as variable payments for utilities, property taxes, common area maintenance, sales taxes, and insurance.
For leases with an initial term of 12 months or less, we have not recognized a right-of-use asset or lease liability on the Unaudited Condensed Consolidated Balance Sheets; we recognize lease expense for these leases on a straight-line basis over the lease terms.
We guarantee the residual values for the majority of our vehicles. The residual values decline over the lease terms to a defined percentage of original cost. In the event the lessor does not realize the residual value when a vehicle is sold, we would be responsible for a portion of the shortfall. Similarly, if the lessor realizes more than the residual value when a vehicle is sold, we would be paid the amount realized over the residual value. Had we terminated all of our operating leases subject to these guarantees at March 31, 2019, our portion of the guaranteed residual value would have totaled approximately $76 million. Other than the residual value guarantees associated with our vehicles discussed above, we do not have any other material residual value guarantees or restrictive covenants.
The amounts recorded in the unaudited condensed consolidated balance sheet as of March 31, 2019 related to our lease agreements are as follows (in thousands):
Leases
 
Classification
 
March 31, 2019
 
 
 
 
 
Assets
 
 
 
 
Operating lease assets, net
 
Operating lease assets, net
 
$
1,279,576

Finance lease assets, net
 
Property, plant and equipment, net
 
42,311

Total leased assets
 
 
 
$
1,321,887

Liabilities
 
 
 
 
Current
 
 
 

Operating
 
Current portion of operating lease liabilities
 
$
216,172

Finance
 
Current portion of long-term obligations
 
10,658

Noncurrent
 
 
 
 
Operating
 
Long-term operating lease liabilities
 
1,109,814

Finance
 
Long-term obligations, excluding current portion
 
31,502

Total lease liabilities
 
 
 
$
1,368,146

    

26



The components of lease expense are as follows (in thousands):
 
 
 
 
Three Months Ended
Lease Cost
 
Classification
 
March 31, 2019
 
 
 
 
 
Operating lease cost
 
Cost of goods sold
 
$
3,835

Operating lease cost
 
Selling, general and administrative expenses
 
73,282

Short-term lease cost
 
Selling, general and administrative expenses
 
667

Variable lease cost
 
Selling, general and administrative expenses
 
25,990

Finance lease cost
 
 
 
 
Amortization of leased assets
 
Depreciation and amortization
 
2,598

Interest on lease liabilities
 
Interest expense, net of interest income
 
448

Sublease income
 
Other income, net
 
(275
)
Net lease cost
 
 
 
$
106,545

The future minimum lease commitments under our noncancelable operating leases at December 31, 2018 were as follows (in thousands):
Years ending December 31:
 
2019
$
294,269

2020
256,172

2021
210,632

2022
158,763

2023
131,518

Thereafter
777,165

Future Minimum Lease Payments
$
1,828,519

    

27



The future minimum lease commitments under our leases at March 31, 2019 are as follows (in thousands):
 
Operating leases
 
Finance leases (1)
 
Total
Nine months ending December 31, 2019
$
222,074

 
$
9,087

 
$
231,161

Years ending December 31:
 
 
 
 
 
2020
265,133

 
10,705

 
275,838

2021
217,839

 
8,571

 
226,410

2022
166,904

 
6,214

 
173,118

2023
138,834

 
2,676

 
141,510

2024
115,318

 
2,210

 
117,528

Thereafter
704,382

 
16,481

 
720,863

Future minimum lease payments
1,830,484

 
55,944

 
1,886,428

Less: Interest
504,498

 
13,784

 
518,282

Present value of lease liabilities
$
1,325,986

 
$
42,160

 
$
1,368,146

(1)
Amounts are included in the scheduled maturities of long-term obligations in the “Liquidity and Capital Resources,” section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 of this Quarterly Report on Form 10-Q.
As of March 31, 2019, we have additional minimum operating lease payments for leases that have not yet commenced of $103 million. These operating leases will commence between April 1, 2019 and December 31, 2020 with lease terms of 2 to 20 years. Most of these leases have not commenced as the assets are in the process of being constructed. We have appropriately considered the build-to-suit and sale-leaseback guidance where appropriate on these leases. No significant build-to-suit or sale-leaseback transactions have been identified.
Other information related to leases was as follows:
Lease Term and Discount Rate
 
March 31, 2019
 
 
 
Weighted-average remaining lease term (years)
 
 
Operating leases
 
9.8

Finance leases
 
8.8

Weighted-average discount rate
 
 
Operating leases
 
5.4
%
Finance leases
 
4.5
%
 
 
Three Months Ended
Supplemental cash flows information (in thousands)
 
March 31, 2019
 
 
 
Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
 
$
73,976

Financing cash flows from finance leases
 
2,642

Leased assets obtained in exchange for new finance lease liabilities
 
5,245

Leased assets obtained in exchange for new operating lease liabilities
 
28,563


Note 13. Employee Benefit Plans
We have funded and unfunded defined benefit plans covering certain employee groups in the U.S. and various European countries. Local statutory requirements govern many of our European plans. The defined benefit plans are mostly closed to new participants and, in some cases, existing participants no longer accrue benefits. As of both March 31, 2019 and December 31, 2018, the aggregate funded status of the defined benefit plans was a liability of $110 million, and is reported in Other noncurrent liabilities and Accrued payroll-related liabilities on our Unaudited Condensed Consolidated Balance Sheets.
    

28



Net periodic benefit cost for our defined benefit plans included the following components for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three Months Ended
 
March 31,
 
2019
 
2018
Service cost
$
587

 
$
468

Interest cost
985

 
670

Expected return on plan assets
(780
)
 
(717
)
Amortization of actuarial (gain) loss
253

 

Net periodic benefit cost
$
1,045

 
$
421

For the three months ended March 31, 2019 and 2018, the service cost component of net periodic benefit cost was classified in Selling, general and administrative expenses, while the other components of net periodic benefit cost were classified in Other income, net in our Unaudited Condensed Consolidated Statements of Income.

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, 2019 was 27.1%, compared to 24.7% for the comparable prior year period. The increase was primarily attributable to the impact of a favorable discrete item of approximately $3 million for the three months ended March 31, 2018, for excess tax benefits from stock-based payments; there was an immaterial amount for the three months ended March 31, 2019. The year over year change for this discrete item increased the effective tax rate by 1.3% compared to the prior year period, while the remaining discrete items increased the effective tax rate by an immaterial amount compared to the prior year period. The effective tax rate increase was also due to an approximately 1.0% increase in the effective tax rate as a result of the Stahlgruber acquisition, including the higher effective tax rate in Germany and the impact of suspended interest deductions due to thin capitalization constraints.

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.
    

29



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, 2019
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Third Party
$
1,302,206


$
1,445,541


$
352,556

 
$

 
$
3,100,303

Intersegment
103

 

 
1,181

 
(1,284
)
 

Total segment revenue
$
1,302,309


$
1,445,541


$
353,737


$
(1,284
)
 
$
3,100,303

Segment EBITDA
$
176,636


$
105,298


$
37,959

 
$

 
$
319,893

Depreciation and amortization (1)
22,239

 
47,011

 
6,957

 

 
76,207

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

(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 gains and losses related to acquisitions, equity method investments, or divestitures, equity in losses and earnings of unconsolidated subsidiaries, and impairment charges. EBITDA, which is the basis for Segment EBITDA, is calculated as net income, less net income (loss) attributable to noncontrolling interest, excluding depreciation, amortization, interest and income tax expense.

30



The table below provides a reconciliation of Net Income to Segment EBITDA (in thousands):
 
Three Months Ended
March 31,
2019
 
2018
Net income
$
99,063

 
$
152,763

Less: net income (loss) attributable to noncontrolling interest
1,015

 
(197
)
Net income attributable to LKQ stockholders
98,048

 
152,960

Add:
 
 
 
Depreciation and amortization
71,002

 
56,458

Depreciation and amortization - cost of goods sold
5,205

 
4,608

Interest expense, net of interest income
36,089

 
28,515

Provision for income taxes
51,550

 
49,584

EBITDA
261,894

 
292,125

Subtract:
 
 
 
Equity in (losses) earnings of unconsolidated subsidiaries (1)
(39,549
)
 
1,412

Add:
 
 
 
Restructuring and acquisition related expenses (2)
3,307

 
4,054

Inventory step-up adjustment - acquisition related

 
403

Impairment of net assets held for sale (3)
15,023

 

Change in fair value of contingent consideration liabilities
120

 
46

Segment EBITDA
$
319,893