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Lkq Corp (LKQ) SEC Filing 10-Q Quarterly report for the period ending Sunday, June 30, 2019

Lkq Corp

CIK: 1065696 Ticker: LKQ
Exhibit 99.1

lkqpressreleaseimage.jpg


LKQ CORPORATION ANNOUNCES RESULTS FOR SECOND QUARTER 2019


Revenue growth of 7% to $3.25 billion
Parts and services organic revenue declined 2.1%; (1.3% on a per day basis)
Non-cash impairment charge of $25 million, net of tax, related to assets held for sale
Net income from continuing operations attributable to LKQ stockholders of $150 million (down 4%); adjusted net income of $204 million (up 6%)
Diluted EPS from continuing operations attributable to LKQ stockholders of $0.48 (down 4%); adjusted diluted EPS of $0.65 (up 7%)
Operating cash flow of $461 million (up 151%) for the quarter; free cash flow of $413 million (up 217%)
Repurchased 4.4 million shares for $120 million; paid down $220 million of debt
2019 annual guidance updated

Chicago, IL (July 25, 2019) -- LKQ Corporation (Nasdaq:LKQ) today reported revenue for the second quarter of 2019 of $3.25 billion, an increase of 7.2% as compared to $3.0 billion in the second quarter of 2018. For the second quarter of 2019, parts and services organic revenue declined 2.1%, (1.3% on a per day basis), and acquisition revenue growth was 12.6%, while the impact of exchange rates was (2.5%), for total parts and services revenue growth of 8.0%.
Net income1 for the second quarter of 2019 was $150 million, a decrease of 4.2% year-over-year. Diluted earnings per share1 for the second quarter of 2019 was $0.48 as compared to $0.50 for the same period of 2018, a decrease of 4.0%. The second quarter 2019 results included a $25 million non-cash impairment charge, net of tax, related to an expected recovery below carrying value of our previously announced assets held for sale. On an adjusted basis, net income was $204 million, an increase of 6.3% as compared to the $192 million for the same period of 2018. On an adjusted basis, diluted earnings per share for the second quarter of 2019 was $0.65, an increase of 6.6% as compared to $0.61 for the same period of 2018.
Dominick Zarcone, President and Chief Executive Officer of LKQ Corporation, stated, “We continued to make progress on our key productivity initiatives during the second quarter, which are having a positive impact on our financial and operational performance. We delivered this performance notwithstanding difficult revenue growth comparisons across all of our operating segments, a soft collision environment in the U.S. and the ongoing macroeconomic challenges and the impact of one less selling day in Europe. Against this backdrop, our continued focus on integrating and simplifying our operating model to drive cash conversion resulted in LKQ generating the highest quarter of operating cash flow in the Company’s history. Additionally, in North America we produced Segment EBITDA margins of 14.4%, a 130-basis point improvement over last year and the highest level since the second quarter of 2017.”

1 References to Net Income and Diluted earnings per share, and the corresponding adjusted figures, in this release reflect amounts from continuing operations attributable to LKQ stockholders.


The following information was filed by Lkq Corp (LKQ) on Thursday, July 25, 2019 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________ 
FORM 10-Q
____________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 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
Illinois

 
60661
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (312621-1950
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      No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes    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
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 
At July 26, 2019, the registrant had outstanding an aggregate of 308,205,030 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
3,248,173

 
$
3,030,751

 
$
6,348,476

 
$
5,751,515

Cost of goods sold
2,000,986

 
1,868,872

 
3,893,025

 
3,535,665

Gross margin
1,247,187

 
1,161,879

 
2,455,451

 
2,215,850

Selling, general and administrative expenses
898,368

 
826,044

 
1,794,900

 
1,592,935

Restructuring and acquisition related expenses
8,377

 
15,878

 
11,684

 
19,932

Impairment of net assets held for sale
33,497

 

 
48,520

 

Depreciation and amortization
70,834

 
63,163

 
141,836

 
119,621

Operating income
236,111

 
256,794

 
458,511

 
483,362

Other expense (income):
 
 
 
 
 
 
 
Interest expense, net of interest income
35,884

 
38,272

 
71,973

 
66,787

Other (income) expense, net
(5,733
)
 
427

 
(9,584
)
 
(2,455
)
Total other expense, net
30,151

 
38,699

 
62,389

 
64,332

Income from continuing operations before provision for income taxes
205,960

 
218,095

 
396,122

 
419,030

Provision for income taxes
55,825

 
60,775

 
107,375

 
110,359

Equity in earnings (losses) of unconsolidated subsidiaries
1,572

 
546

 
(37,977
)
 
1,958

Income from continuing operations
151,707


157,866

 
250,770

 
310,629

Net income from discontinued operations
398

 

 
398

 

Net income
152,105

 
157,866

 
251,168

 
310,629

Less: net income attributable to continuing noncontrolling interest
1,352

 
859

 
2,367

 
662

Less: net income attributable to discontinued noncontrolling interest
192

 

 
192

 

Net income attributable to LKQ stockholders
$
150,561

 
$
157,007

 
$
248,609

 
$
309,967

 
 
 
 
 
 
 
 
Basic earnings per share: (1)
 
 
 
 
 
 
 
Income from continuing operations
$
0.49

 
$
0.51

 
$
0.80

 
$
1.00

Net income from discontinued operations
0.00

 

 
0.00

 

Net income
0.49

 
0.51

 
0.80

 
1.00

Less: net income attributable to continuing noncontrolling interest
0.00

 
0.00

 
0.01

 
0.00

Less: net income attributable to discontinued noncontrolling interest
0.00

 

 
0.00

 

Net income attributable to LKQ stockholders
$
0.48

 
$
0.50

 
$
0.79

 
$
1.00

 
 
 
 
 
 
 
 
Diluted earnings per share: (1)
 
 
 
 
 
 
 
Income from continuing operations
$
0.49

 
$
0.50


$
0.80

 
$
0.99

Net income from discontinued operations
0.00

 

 
0.00

 

Net income
0.49

 
0.50

 
0.80

 
0.99

Less: net income attributable to continuing noncontrolling interest
0.00

 
0.00

 
0.01

 
0.00

Less: net income attributable to discontinued noncontrolling interest
0.00

 

 
0.00

 

Net income attributable to LKQ stockholders
$
0.48

 
$
0.50

 
$
0.79

 
$
0.99


(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.
2




LKQ CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Income
(In thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
152,105

 
$
157,866

 
$
251,168

 
$
310,629

Less: net income attributable to continuing noncontrolling interest
1,352

 
859

 
2,367

 
662

Less: net income attributable to discontinued noncontrolling interest
192

 

 
192

 

Net income attributable to LKQ stockholders
150,561

 
157,007

 
248,609

 
309,967

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation, net of tax
5,602

 
(105,164
)
 
(4,293
)
 
(56,679
)
Net change in unrealized gains/losses on cash flow hedges, net of tax
(5,650
)
 
2,406

 
(8,387
)
 
5,660

Net change in unrealized gains/losses on pension plans, net of tax
28

 
(807
)
 
219

 
(1,428
)
Net change in other comprehensive income (loss) from unconsolidated subsidiaries
2,321

 
2,122

 
(1,142
)
 
1,517

Other comprehensive income (loss)
2,301

 
(101,443
)
 
(13,603
)
 
(50,930
)
 
 
 
 
 
 
 
 
Comprehensive income
154,406

 
56,423

 
237,565

 
259,699

Less: comprehensive income attributable to continuing noncontrolling interest
1,352

 
859

 
2,367

 
662

Less: comprehensive income attributable to discontinued noncontrolling interest
192

 

 
192

 

Comprehensive income attributable to LKQ stockholders
$
152,862

 
$
55,564

 
$
235,006

 
$
259,037


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




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
 
June 30,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
375,967

 
$
331,761

Receivables, net
1,285,802

 
1,154,083

Inventories
2,650,138

 
2,836,075

Prepaid expenses and other current assets
319,942

 
199,030

Total current assets
4,631,849

 
4,520,949

Property, plant and equipment, net
1,206,690

 
1,220,162

Operating lease assets, net
1,294,541

 

Intangible assets:
 
 
 
Goodwill
4,409,925

 
4,381,458

Other intangibles, net
880,123

 
928,752

Equity method investments
133,154

 
179,169

Other noncurrent assets
147,954

 
162,912

Total assets
$
12,704,236

 
$
11,393,402

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,031,952

 
$
942,398

Accrued expenses:
 
 
 
Accrued payroll-related liabilities
171,650

 
172,005

Refund liability
106,612

 
104,585

Other accrued expenses
309,734

 
288,425

Other current liabilities
134,855

 
61,109

Current portion of operating lease liabilities
219,502

 

Current portion of long-term obligations
132,641

 
121,826

Total current liabilities
2,106,946

 
1,690,348

Long-term operating lease liabilities, excluding current portion
1,122,276

 

Long-term obligations, excluding current portion
3,919,902

 
4,188,674

Deferred income taxes
303,179

 
311,434

Other noncurrent liabilities
342,185

 
364,194

Commitments and contingencies
 
 


Stockholders' equity:
 
 
 
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 319,010,278 shares issued and 309,695,052 shares outstanding at June 30, 2019; 318,417,821 shares issued and 316,146,114 shares outstanding at December 31, 2018
3,190

 
3,184

Additional paid-in capital
1,429,129

 
1,415,188

Retained earnings
3,847,485

 
3,598,876

Accumulated other comprehensive loss
(188,553
)
 
(174,950
)
Treasury stock, at cost; 9,315,226 shares at June 30, 2019 and 2,271,707 shares at December 31, 2018
(250,762
)
 
(60,000
)
Total Company stockholders' equity
4,840,489

 
4,782,298

Noncontrolling interest
69,259

 
56,454

Total stockholders' equity
4,909,748

 
4,838,752

Total liabilities and stockholders' equity
$
12,704,236

 
$
11,393,402


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




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
 
Six Months Ended
 
June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
251,168

 
$
310,629

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
152,361

 
129,504

Impairment of Mekonomen equity method investment
39,551

 

Impairment of net assets held for sale
48,520

 

Stock-based compensation expense
13,659

 
11,844

Other
(3,516
)
 
4,356

Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:
 
 
 
Receivables, net
(149,052
)
 
(112,178
)
Inventories
131,229

 
(12,777
)
Prepaid income taxes/income taxes payable
25,967

 
6,090

Accounts payable
96,888

 
(25,380
)
Other operating assets and liabilities
31,629

 
16,581

Net cash provided by operating activities
638,404

 
328,669

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment
(101,268
)
 
(115,421
)
Acquisitions, net of cash acquired
(14,767
)
 
(1,135,970
)
Other investing activities, net
(735
)
 
2,174

Net cash used in investing activities
(116,770
)
 
(1,249,217
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Debt issuance costs
(35
)
 
(16,759
)
Proceeds from issuance of Euro Notes (2026/28)

 
1,232,100

Purchase of treasury stock
(190,762
)
 

Borrowings under revolving credit facilities
312,880

 
613,658

Repayments under revolving credit facilities
(471,439
)
 
(766,597
)
Repayments under term loans
(4,375
)
 
(8,810
)
Borrowings under receivables securitization facility
36,600

 

Repayments under receivables securitization facility
(146,600
)
 

Repayments of other debt, net
(8,367
)
 
(2,444
)
Other financing activities, net
110

 
3,195

Net cash (used in) provided by financing activities
(471,988
)
 
1,054,343

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(102
)
 
(68,359
)
Net increase in cash, cash equivalents and restricted cash
49,544

 
65,436

Cash, cash equivalents and restricted cash of continuing operations, beginning of period
337,250

 
279,766

Cash, cash equivalents and restricted cash of continuing and discontinued operations, end of period
386,794

 
345,202

Less: Cash and cash equivalents of discontinued operations, end of period
5,372

 

Cash, cash equivalents and restricted cash, end of period
$
381,422

 
$
345,202

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash
 
 
 
Cash and cash equivalents
$
375,967

 
$
345,202

Restricted cash included in Other noncurrent assets
5,455

 

Cash, cash equivalents and restricted cash, end of period
$
381,422

 
$
345,202

 
 
 
 
Supplemental disclosure of cash paid for:
 
 
 
Income taxes, net of refunds
$
88,001

 
$
110,745

Interest
75,259

 
55,768

Supplemental disclosure of noncash investing and financing activities:
 
 
 
Stock issued in acquisitions
$

 
$
251,334

Noncash property, plant and equipment additions
14,227

 
7,004

Notes payable and other financing obligations, including notes issued, debt assumed and settlement of pre-existing balances in connection with business acquisitions
45,420

 
65,460

Contingent consideration liabilities
5,377

 
34


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




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Stockholders' Equity
(In thousands)
 
LKQ Stockholders
 
 
 
 
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive (Loss) Income
 
Noncontrolling Interest
 
Total Stockholders' Equity
 
Shares
 
Amount
 
Shares
 
Amount
BALANCE, April 1, 2019
318,889

 
$
3,189

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

 
$
3,696,924

 
$
(190,854
)
 
$
57,292

 
$
4,856,774

Net income

 

 

 

 

 
150,561

 

 
1,544

 
152,105

Other comprehensive income

 

 

 

 

 

 
2,301

 

 
2,301

Purchase of treasury stock

 

 
(4,400
)
 
(120,300
)
 

 

 

 

 
(120,300
)
Vesting of restricted stock units, net of shares withheld for employee tax
68

 
1

 

 

 
(78
)
 

 

 

 
(77
)
Stock-based compensation expense

 

 

 

 
7,986

 

 

 

 
7,986

Exercise of stock options
53

 
0

 

 

 
536

 

 

 

 
536

Capital contributions from, net of dividends declared to, noncontrolling interest shareholder

 

 

 

 

 

 

 
162

 
162

Acquired noncontrolling interest (1)

 

 

 

 

 

 

 
10,261

 
10,261

BALANCE, June 30, 2019
319,010

 
$
3,190

 
(9,315
)
 
$
(250,762
)
 
$
1,429,129

 
$
3,847,485

 
$
(188,553
)
 
$
69,259

 
$
4,909,748


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

 

 

 

 

 
248,609

 

 
2,559

 
251,168

Other comprehensive loss

 

 

 

 

 


 
(13,603
)
 


 
(13,603
)
Purchase of treasury stock

 

 
(7,043
)
 
(190,762
)
 

 

 

 

 
(190,762
)
Vesting of restricted stock units, net of shares withheld for employee tax
371

 
4

 

 

 
(1,158
)
 

 

 

 
(1,154
)
Stock-based compensation expense

 

 

 

 
13,659

 

 

 

 
13,659

Exercise of stock options
236

 
2

 

 

 
1,868

 

 

 

 
1,870

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


 

 

 
(428
)
 

 

 

 
(428
)
Capital contributions from, net of dividends declared to, noncontrolling interest shareholder

 

 

 

 

 

 

 
(15
)
 
(15
)
Acquired noncontrolling interest (1)

 

 

 

 

 

 

 
10,261

 
10,261

BALANCE, June 30, 2019
319,010

 
$
3,190

 
(9,315
)
 
$
(250,762
)
 
$
1,429,129

 
$
3,847,485

 
$
(188,553
)
 
$
69,259

 
$
4,909,748

                                                                                                                 
(1) The amount acquired during 2019 relates to discontinued operations. See Note 3, "Discontinued Operations," for further details.

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




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Stockholders' Equity
(In thousands)
 
LKQ Stockholders
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive (Loss) Income
 
Noncontrolling Interest
 
Total Stockholders' Equity
 
Shares
Issued
 
Amount
 
BALANCE, April 1, 2018
309,631

 
$
3,096

 
$
1,146,391

 
$
3,271,718

 
$
(14,618
)
 
$
12,394

 
$
4,418,981

Net income

 

 

 
157,007

 

 
859

 
157,866

Other comprehensive loss

 

 

 

 
(101,443
)
 

 
(101,443
)
Stock issued in acquisitions
8,056

 
81

 
251,253

 

 

 

 
251,334

Vesting of restricted stock units, net of shares withheld for employee tax
44

 

 
(381
)
 

 

 

 
(381
)
Stock-based compensation expense

 

 
5,862

 

 

 

 
5,862

Exercise of stock options
95

 
1

 
666

 

 

 

 
667

Shares withheld for net share settlement of stock option awards
(5
)
 

 
(161
)
 

 

 

 
(161
)
Acquired noncontrolling
interest

 

 

 

 

 
44,250

 
44,250

BALANCE, June 30, 2018
317,821

 
$
3,178

 
$
1,403,630

 
$
3,428,725

 
$
(116,061
)
 
$
57,503

 
$
4,776,975


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

 

 

 
309,967

 

 
662

 
310,629

Other comprehensive loss

 

 

 

 
(50,930
)
 

 
(50,930
)
Stock issued in acquisitions
8,056

 
81

 
251,253

 

 

 

 
251,334

Vesting of restricted stock units, net of shares withheld for employee tax
344

 
3

 
(2,780
)
 

 

 

 
(2,777
)
Stock-based compensation expense

 

 
11,844

 

 

 

 
11,844

Exercise of stock options
321

 
3

 
2,919

 

 

 

 
2,922

Shares withheld for net share settlement of stock option awards
(27
)
 

 
(1,057
)
 

 

 

 
(1,057
)
Adoption of ASU 2018-02 (see Note 9)

 

 

 
(5,345
)
 
5,345

 

 

Capital contributions from noncontrolling interest shareholder

 

 

 

 

 
4,107

 
4,107

Acquired noncontrolling
  interest

 

 

 

 

 
44,250

 
44,250

BALANCE, June 30, 2018
317,821

 
$
3,178

 
$
1,403,630

 
$
3,428,725

 
$
(116,061
)
 
$
57,503

 
$
4,776,975


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 six months ended June 30, 2019, we completed five acquisitions, including one wholesale business and one self service business in North America, and three wholesale businesses in Europe. These acquisitions were not material to our results of operations or financial position as of and for the three and six months ended June 30, 2019. Total acquisition date fair value of the consideration for our acquisitions for the six months ended June 30, 2019 was $48 million, composed of $17 million of cash paid (net of cash acquired), $5 million for the estimated value of contingent payments to former owners (with maximum payments totaling $7 million), $1 million of other purchase price obligations (non-interest bearing), $21 million of notes payable, and $4 million of pre-existing balances considered to be effectively settled as a result of the acquisitions. In addition, we assumed $8 million of existing debt as of the acquisition dates.
On May 30, 2018, we acquired Stahlgruber GmbH ("Stahlgruber"), a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories with operations in Germany, Austria, Italy, Slovenia, and Croatia, with further sales to Switzerland. Total acquisition date fair value of the consideration for our Stahlgruber acquisition was €1.2 billion ($1.4 billion), composed of €1.0 billion ($1.1 billion) of cash paid (net of cash acquired), and €215 million ($251 million) of newly issued shares of LKQ common stock. We financed the acquisition with the proceeds from €1.0 billion ($1.2 billion) of senior notes, the direct issuance to Stahlgruber's owner of 8,055,569 newly issued shares of LKQ common stock, and borrowings under our existing revolving credit facility. We recorded $915 million ($908 million in 2018 and $7 million of adjustments in the six months ended June 30, 2019) of goodwill related to our acquisition of Stahlgruber.
On May 3, 2018, the European Commission cleared the acquisition of Stahlgruber for the entire European Union, except with respect to the wholesale automotive parts business in the Czech Republic. The acquisition of Stahlgruber’s Czech Republic wholesale business was referred to the Czech Republic competition authority for review. On May 10, 2019, the Czech Republic competition authority approved our acquisition of Stahlgruber’s Czech Republic wholesale business subject to the requirement that we divest certain of the acquired locations. We acquired Stahlgruber’s Czech Republic wholesale business on May 29, 2019 and decided to divest all of the acquired locations. We immediately classified the business as discontinued operations because the business was never integrated into our Europe segment; see Note 3, "Discontinued Operations" for further information. The Czech Republic wholesale business represents an immaterial portion of Stahlgruber's revenue and profitability. There was no additional consideration beyond the previously remitted amounts for the Stahlgruber transaction required to complete the acquisition of the Czech Republic wholesale business.
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.

8



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 six months ended June 30, 2019 and the last six 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.
During the second 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 noncurrent 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. 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.

9



The fair value of our intangible assets is based on a number of inputs, including projections of future cash flows, discount rates, assumed royalty rates and customer attrition rates, all of which are Level 3 inputs. We used the relief-from-royalty method to value trade names, trademarks, software and other technology assets, and we used the multi-period excess earnings method to value customer relationships. The relief-from-royalty method assumes that the intangible asset has value to the extent that its owner is relieved of the obligation to pay royalties for the benefits received from the intangible asset. The multi-period excess earnings method is based on the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset charges. The fair value of our property, plant and equipment is determined using inputs such as market comparables and current replacement or reproduction costs of the asset, adjusted for physical, functional and economic factors; these adjustments to arrive at fair value use unobservable inputs in which little or no market data exists, and therefore, these inputs are considered to be Level 3 inputs. See Note 12, "Fair Value Measurements" for further information regarding the tiers in the fair value hierarchy.
The acquisition of Stahlgruber 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 six months ended June 30, 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 six months ended June 30, 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. We have excluded the May 29, 2019 acquisition of the Czech Republic wholesale business as the business was never integrated into our Europe segment. The pro forma adjustments are based upon unaudited financial information of the acquired entities (in thousands, except per share data):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Revenue, as reported
$
3,248,173

 
$
3,030,751

 
$
6,348,476

 
$
5,751,515

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

 
325,871

 

 
815,405

Other acquisitions
1,417

 
47,680

 
16,481

 
99,837

Pro forma revenue
$
3,249,590

 
$
3,404,302

 
$
6,364,957

 
$
6,666,757

 
 
 
 
 
 
 
 
Income from continuing operations, as reported (1)
$
151,707

 
$
157,866

 
$
250,770

 
$
310,629

Income from continuing operations of purchased businesses for the period prior to acquisition, and pro forma purchase accounting adjustments:
 
 
 
 
 
 
 
Stahlgruber
3,042

 
7,217

 
6,116

 
8,490

Other acquisitions
353

 
1,502

 
1,990

 
3,106

Acquisition related expenses, net of tax (2)
100

 
11,779

 
324

 
13,305

Pro forma income from continuing operations
155,202

 
178,364

 
259,200

 
335,530

Less: Net income attributable to continuing noncontrolling interest, as reported
1,352

 
859

 
2,367

 
662

Less: Pro forma net income attributable to continuing noncontrolling interest

 
2,271

 

 
2,799

Pro forma net income from continuing operations attributable to LKQ stockholders (3)
$
153,850

 
$
175,234

 
$
256,833

 
$
332,069


(1)
2018 amounts include interest expense for the period from April 9, 2018 through June 30, 2018 recorded on the senior notes issued in connection with our acquisition of Stahlgruber.

10



(2)
Includes expenses related to acquisitions closed in the period and excludes expenses for acquisitions not yet completed.
(3)
Excludes our acquisition of the Czech Republic wholesale business which is classified as discontinued operations.
Unaudited pro forma supplemental information is based upon accounting estimates and judgments that we believe are reasonable. The unaudited pro forma supplemental information includes the effect of purchase accounting adjustments, such as the adjustment of inventory acquired to fair value, adjustments to depreciation on acquired property, plant and equipment, adjustments to rent expense for above or below market leases, adjustments to amortization on acquired intangible assets, adjustments to interest expense, and the related tax effects. The pro forma impact of our acquisitions also reflects the elimination of acquisition related expenses, net of tax. Refer to Note 6, "Restructuring and Acquisition Related Expenses," for further information regarding our acquisition related expenses. These pro forma results are not necessarily indicative of what would have occurred if the acquisitions had been in effect for the periods presented or of future results.

Note 3. Discontinued Operations
As described in Note 2, "Business Combinations," we classified the acquired Stahlgruber Czech Republic wholesale business as discontinued operations. We intend to divest the business within the next year, and thus, the net assets are reflected on the Unaudited Condensed Consolidated Balance Sheet at the lower of fair value less cost to sell or carrying value. As of June 30, 2019, the assets held for sale, liabilities held for sale, and noncontrolling interest are recorded within Prepaid expenses and other current assets, Other current liabilities, and Noncontrolling interest, respectively, on the Unaudited Condensed Consolidated Balance Sheet. As of the acquisition date, we acquired $5 million of cash and assumed $6 million of existing debt.
Fair value was based on the estimated selling price, with factors including projected market multiples and any reasonable 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 analysis. The inputs utilized in the fair value estimate are classified as Level 3 within the fair value hierarchy. The fair value of the net assets was measured on a non-recurring basis as of June 30, 2019.

Note 4. Financial Statement Information
Allowance for Doubtful Accounts
We have a reserve for uncollectible accounts, which was approximately $52 million and $57 million at June 30, 2019 and December 31, 2018, respectively.
Inventories
Inventories consist of the following (in thousands):
 
June 30,
 
December 31,
 
2019
 
2018
Aftermarket and refurbished products
$
2,181,873

 
$
2,309,458

Salvage and remanufactured products
441,579

 
503,199

Manufactured products
26,686

 
23,418

Total inventories (1)
$
2,650,138

 
$
2,836,075


(1)
As of June 30, 2019, $61 million of inventory was included in assets 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 June 30, 2019, manufactured products inventory was composed of $18 million of raw materials, $3 million of work in process, and $6 million of finished goods. As of December 31, 2018, manufactured products inventory was composed of $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 half 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 $33 million and $49 million during the three and six months ended June 30, 2019, respectively, which were recorded within Impairment of net assets held for sale in the Unaudited Condensed Consolidated Statement of Income.

11



Excluding the Stahlgruber Czech Republic wholesale business discussed in Note 3, "Discontinued Operations," as of June 30, 2019, there were $56 million of assets held for sale, including $5 million of goodwill that was reclassified as held for sale related to our Europe segment, and $17 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 $165 million during the twelve-month period ended June 30, 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 reasonable 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 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 June 30, 2019.
Investments in Unconsolidated Subsidiaries
Our investment in unconsolidated subsidiaries was $133 million and $179 million as of June 30, 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 June 30, 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 equity in earnings of $3 million and an equity loss of $37 million during the three and six months ended June 30, 2019, respectively, and equity in earnings of $1 million and $2 million during the three and six months ended June 30, 2018, respectively, 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. The Level 1 fair value of our equity investment in the publicly traded Mekonomen common stock at June 30, 2019 was $125 million (using the Mekonomen share price of SEK 77 as of June 30, 2019) compared to a carrying value of $110 million.
During the three months ended March 31, 2019, 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 earnings (losses) 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.
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
29,529

Warranty claims
(22,770
)
Balance as of June 30, 2019
$
30,021



12



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 six months ended June 30, 2019, we repurchased 7.0 million shares of common stock for an aggregate price of $191 million. During 2018, we repurchased 2.3 million shares of common stock for an aggregate price of $60 million. As of June 30, 2019, there is $249 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.
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 currently 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

13



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.
  
Note 5. 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
North America
$
1,165,482

 
$
1,165,422

 
$
2,321,180

 
$
2,338,007

Europe
1,510,952

 
1,279,996

 
2,951,793

 
2,317,042

Specialty
410,263

 
411,633

 
762,819

 
762,307

Parts and services
3,086,697

 
2,857,051

 
6,035,792

 
5,417,356

Other
161,476

 
173,700

 
312,684

 
334,159

Total revenue
$
3,248,173

 
$
3,030,751

 
$
6,348,476

 
$
5,751,515


Parts and Services
Our parts revenue is generated from the sale of vehicle products including replacement parts, components and systems used in the repair and maintenance of vehicles and specialty products and accessories to improve the performance, functionality and appearance of vehicles. Services revenue includes (i) additional services that are generally billed concurrently with the related product sales, such as the sale of service-type warranties, (ii) fees for admission to our self service yards, and (iii) diagnostic and repair services.
In North America, our vehicle replacement products include sheet metal collision parts such as doors, hoods, and fenders; bumper covers; head and tail lamps; automotive glass products such as windshields; mirrors and grilles; wheels; and large mechanical items such as engines and transmissions. In Europe, our products include a wide variety of small mechanical products such as brake pads, discs and sensors; clutches; electrical products such as spark plugs and batteries; steering and suspension products; filters; and oil and automotive fluids. In our Specialty operations, we serve six product segments: truck and off-road; speed and performance; RV; towing; wheels, tires and performance handling; and miscellaneous accessories. 
Our service-type warranties typically have service periods ranging from 6 months to 36 months. Under FASB Accounting Standards Codification Topic 606 ("ASC 606"), 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
21,241

Warranty revenue recognized
(19,171
)
Balance as of June 30, 2019
$
26,076


Other Revenue

14



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 16, "Segment and Geographic Information" for information related to our revenue by geographic region.
Variable Consideration
The amount of revenue ultimately received from the customer can vary due to variable consideration which includes returns, discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items. 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. We recorded a refund liability and return asset for expected returns of $107 million and $57 million as of June 30, 2019, respectively and $105 million and $56 million as of December 31, 2018. 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 $86 million and $103 million as of June 30, 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 6. 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 and six months ended June 30, 2019.
Acquisition related expenses for the three and six months ended June 30, 2018 were $14 million and $16 million, respectively, which included external costs primarily related to our May 2018 acquisition of Stahlgruber.
Acquisition Integration Plans and Restructuring
During the three and six months ended June 30, 2019, we incurred $3 million and $6 million of restructuring expenses, respectively, related to our acquisition integration efforts. These expenses included approximately $1 million and $3 million for the three and six months ended June 30, 2019, respectively, related to the integration of our acquisition of Andrew Page Limited ("Andrew Page").
During the three and six months ended June 30, 2018, we incurred $2 million and $4 million of restructuring expenses, respectively. Restructuring expenses incurred during the three and six months ended June 30, 2018 were primarily related to the integration of our acquisition of Andrew Page. This integration included the closure of duplicate facilities and termination of employees.
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 currently expected to be approximately $15 million.
2019 Restructuring Program
In the second quarter, we began implementing a cost reduction initiative, covering all three of our reportable segments, designed to eliminate underperforming assets and cost ineffectiveness. We have incurred and expect to incur costs for employee severance and related employee termination benefits; lease exit costs, such as lease termination fees and accelerated amortization of operating lease assets; and other costs related to facility closures, such as moving expenses to relocate inventory and equipment.
During the three months ended June 30, 2019, we incurred $5 million of restructuring expense primarily related to employee severance and related termination benefits. We currently expect to incur additional expenses of between $20 million and $25 million through the end of 2020 to complete the program.

15




Note 7. Stock-Based Compensation
In order to attract and retain employees, non-employee directors, consultants, and other persons associated with us, we grant equity-based awards under the LKQ Corporation 1998 Equity Incentive Plan (the “Equity Incentive Plan”). We have granted restricted stock units ("RSUs"), stock options, and restricted stock under the Equity Incentive Plan. We expect to issue new or treasury shares of common stock to cover past and future equity grants.
RSUs
The RSUs we have issued vest over periods of up to five years, subject to a continued service condition. Currently outstanding RSUs (other than PSUs, which are described below) contain either a time-based vesting condition or a combination of a performance-based vesting condition and a time-based vesting condition, in which case both conditions must be met before any RSUs vest. For most of the RSUs containing a performance-based vesting condition, the Company must report positive diluted earnings per share, subject to certain adjustments, during any fiscal year period within five years following the grant date; we have an immaterial amount of RSUs containing other performance-based vesting conditions. Each RSU converts into one share of LKQ common stock on the applicable vesting date. The grant date fair value of RSUs is based on the market price of LKQ stock on the grant date. Our 2019 annual grant of RSUs occurred 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 participant vests in a prorated amount of the RSU grant based on the portion of the year employed. For our RSU grants prior to 2019, participants forfeit their unvested shares upon retirement.
The fair value of RSUs that vested during the six months ended June 30, 2019 was $11 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 six months ended June 30, 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 
981,906

 
$
27.86

 
 
 
 
Vested
(416,262
)
 
$
32.72

 
 
 
 
Forfeited / Canceled
(48,674
)
 
$
34.25

 
 
 
 
Unvested as of June 30, 2019
1,992,652

 
$
31.93

 
 
 
 
Expected to vest after June 30, 2019
1,813,605

 
$
31.97

 
2.9
 
$
48,260


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

In 2019, we granted performance-based three-year RSUs ("PSUs") to certain employees, including our executive officers, under our Equity Incentive Plan. As these awards are performance-based, the exact number of shares to be paid out may be up to twice the grant amount, depending on the Company's 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. In 2019, we also granted an immaterial amount of performance-based RSUs to employees that have different performance metrics than those described above.
The following table summarizes activity related to our PSUs under the Equity Incentive Plan for the six months ended June 30, 2019:

16



 
Number
Outstanding
 
Weighted
Average
Grant Date
Fair Value
 
Weighted Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
   (in thousands) (1)
Unvested as of January 1, 2019

 
$

 
 
 
 
Granted  (2)
136,170

 
$
27.69

 
 
 
 
Unvested as of June 30, 2019
136,170

 
$
27.69

 
 
 
 
Expected to vest after June 30, 2019
136,170

 
$
27.69

 
2.8
 
$
3,623


(1)
The aggregate intrinsic value of expected to vest PSUs represents the total pretax intrinsic value (the fair value of the Company's stock on the last day of each period multiplied by the number of units at target) that would have been received by the holders had all PSUs vested. This amount changes based on the market price of the Company’s common stock and the achievement of the performance metrics relative to the established targets.
(2)
Represents the number of PSUs at target payout.
Stock Options
Stock options vest over periods of up to five years, subject to a continued service condition. Stock options expire either six years or ten years from the date they are granted. No options were granted during the six months ended June 30, 2019. No options vested during the six months ended June 30, 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 six months ended June 30, 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
(236,241
)
 
$
7.92

 
 
 
$
4,324

Canceled
(7,037
)
 
$
16.45

 
 
 
 
Balance as of June 30, 2019
808,216

 
$
10.75

 
0.5
 
$
13,000

Exercisable as of June 30, 2019
808,216

 
$
10.75

 
0.5
 
$
13,000


(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 $8 million and $14 million for the three and six months ended June 30, 2019, respectively, and $6 million and $12 million for the three and six months ended June 30, 2018, respectively. As of June 30, 2019, unrecognized compensation expense related to unvested RSUs and PSUs was $51 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.


17



Note 8. Earnings Per Share
The following chart sets forth the computation of earnings per share (in thousands, except per share amounts):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Income from continuing operations
$
151,707

 
$
157,866

 
$
250,770

 
$
310,629

Denominator for basic earnings per share—Weighted-average shares outstanding
311,891

 
312,556

 
313,460

 
311,045

Effect of dilutive securities:
 
 
 
 
 
 
 
RSUs
315

 
406

 
364

 
512

PSUs

 

 

 

Stock options
513

 
1,050

 
536

 
1,131

Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding
312,719

 
314,012

 
314,360

 
312,688

Basic earnings per share from continuing operations
$
0.49

 
$
0.51

 
$
0.80

 
$
1.00

Diluted earnings per share from continuing operations
$
0.49

 
$
0.50

 
$
0.80

 
$
0.99


The following table sets forth the number of employee stock-based compensation awards outstanding but not included in the computation of diluted earnings per share because their effect would have been antidilutive for the three and six months ended June 30, 2019 and 2018 (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Antidilutive securities:
 
 
 
 
 
 
 
RSUs
559

 
575

 
579

 
288

Stock options
32

 

 
32

 




18



Note 9. Accumulated Other Comprehensive Income (Loss)
The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands):
 
 
Three Months Ended
 
 
June 30, 2019
 
 
Foreign
Currency
Translation
 
Unrealized Gain (Loss)
on Cash Flow Hedges
 
Unrealized (Loss) Gain
on Pension Plans
 
Other Comprehensive (Loss) Income from Unconsolidated Subsidiaries
 
Accumulated
Other
Comprehensive
(Loss) Income
Beginning balance
 
$
(187,492
)
 
$
11,637

 
$
(7,884
)
 
$
(7,115
)
 
$
(190,854
)
Pretax (loss) income
 
5,602

 
(9,418
)
 

 

 
(3,816
)
Income tax effect
 

 
2,230

 

 

 
2,230

Reclassification of unrealized (gain) loss
 

 
2,013

 
37

 

 
2,050

Reclassification of deferred income taxes
 

 
(475
)
 
(9
)
 

 
(484
)
Other comprehensive income from unconsolidated subsidiaries
 

 

 

 
2,321

 
2,321

Ending balance
 
$
(181,890
)
 
$
5,987

 
$
(7,856
)
 
$
(4,794
)
 
$