v2.3.0.11
Business Combinations
 6 Months Ended
Jun. 30, 2011
Business Combinations  
Business Combinations

Note 10. Business Combinations

During the six months ended June 30, 2011, we made seven acquisitions (five in the wholesale products business, one in the recycled heavy-duty truck products business and one self service retail operation). Our acquisitions included the purchase of an engine remanufacturer, included in the wholesale operating segment, which expanded our presence in the remanufacturing industry that we entered in 2010. Additionally, our acquisition of an automotive heating and cooling component distributor, also included in our wholesale operating segment, supplements our expansion into the automotive heating and cooling aftermarket products market. Our wholesale business acquisitions also included the purchase of the U.S. vehicle refinish paint distribution business of Akzo Nobel Automotive and Aerospace Coatings ("Akzo Nobel"), which will allow us to increase our paint and related product offerings and expand our geographic presence in the automotive paint market.

Total consideration for the acquisitions during the six months ended June 30, 2011 was $100.0 million, composed of $95.6 million of cash (net of cash acquired), $1.6 million of notes payable and $2.8 million of other purchase price obligations (non-interest bearing). In conjunction with the acquisition of the U.S. vehicle refinish paint distribution business of Akzo Nobel on May 27, 2011, we entered into a wholesaler agreement under which we became an authorized distributor of Akzo Nobel products in the acquired markets. Included in this agreement is a requirement to make an additional payment to Akzo Nobel in the event that our purchases of Akzo Nobel product do not meet specified thresholds from June 1, 2011 to May 31, 2014. The required payment will be calculated as the difference between our actual purchases and the targeted purchase levels outlined in the agreement for the specified period with a maximum payment of $21.0 million. As of June 30, 2011, we had not determined the acquisition-date fair value of this contingent consideration. We will disclose the fair value estimate in future filings if the calculated amount is material.

During the six months ended June 30, 2011, we recorded $28.2 million of goodwill related to these acquisitions and immaterial adjustments to preliminary purchase price allocations related to certain of our 2010 acquisitions. Of this amount, approximately $16.4 million is expected to be deductible for income tax purposes. In the period between the acquisition dates and June 30, 2011, our 2011 acquisitions generated approximately $53.4 million of revenue and $1.9 million of operating income.

In July 2011, we completed four acquisitions (three in the wholesale products business and one self service retail business). We are in the process of completing the purchase accounting for these acquisitions, and as a result, we are unable to disclose the amounts recognized for each major class of assets acquired and liabilities assumed.

During the year ended December 31, 2010, we made 20 acquisitions (16 in the wholesale products business, one in the recycled heavy-duty truck products business, two self service retail operations and one tire recycling business). Our acquisitions included the purchase of an engine remanufacturer, included in the wholesale operating segment, which allowed us to further vertically integrate our supply chain. We expanded our product offerings through the acquisition of an automotive heating and cooling component business, included in the wholesale operating segment, as well as a tire recycling business, which supports all of our operating segments. Our 2010 acquisitions have also enabled us to expand our geographic presence, most notably in Canada through our acquisition of Cross Canada, an aftermarket product supplier.

Total consideration for the 2010 acquisitions was $170.4 million, composed of $143.6 million of cash (net of cash acquired), $5.5 million of notes payable, $6.4 million of other purchase price obligations (non-interest bearing) and $14.9 million in stock issued (689,655 shares). Other purchase price obligations included a contingent payment, the fair value of which was adjusted downward by $1.6 million in 2011 as a result of changes in the likelihood of meeting the specified performance targets.This adjustment was included in Other Income, net on our Unaudited Consolidated Condensed Statements of Income for the three and six month periods ended June 30, 2011. The $14.9 million of common stock was issued in connection with our acquisition of Cross Canada on November 1, 2010. The fair value of common stock issued was based on the market price of LKQ stock on the date of issuance. We recorded goodwill of $91.8 million for the 2010 acquisitions, of which $74.9 million is expected to be deductible for income tax purposes.

The acquisitions are being 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 market values at the dates of acquisition. The purchase price allocations for the acquisitions made during the six months ended June 30, 2011 and the last two quarters of 2010 are preliminary as we are in the process of determining the following: 1) valuation amounts for certain of the inventories acquired; 2) valuation amounts for certain intangible assets acquired; 3) the acquisition-date fair value of certain liabilities assumed; 4) the final estimation of the tax basis of the entities acquired; and 5) the acquisition-date fair value of contingent consideration issued.

The purchase price allocations for the acquisitions completed during the six months ended June 30, 2011 and the year ended December 31, 2010 are as follows (in thousands):

 

     June 30, 2011
(Preliminary)		     December 31, 2010
(Preliminary)		  

Receivables

    $ 20,731      $ 27,774   

Receivable reserves

      (620 )      (2,186 ) 

Inventory

      42,385        38,121   

Prepaid expenses

      2,516        1,480   

Property and equipment

      5,844        18,517   

Goodwill

      28,156        91,757   

Other intangibles

      2,246        6,163   

Other assets

      9,132        1,529   

Deferred income taxes

      2,565        2,922   

Current liabilities assumed

      (12,989 )      (15,665 ) 

Other purchase price obligations

      (2,825 )      (6,359 ) 

Notes issued

      (1,550 )      (5,530 ) 

Stock issued

      —          (14,945 ) 
                

Cash used in acquisitions, net of cash acquired

    $ 95,591      $ 143,578   
                

The primary reason for our acquisitions made during the six months ended June 30, 2011 and the year ended December 31, 2010 was to increase our stockholder value by leveraging our strategy of becoming a one-stop provider for alternative vehicle replacement products. These acquisitions enabled us to expand our market presence, expand our product offerings and enter new markets. These factors contributed to purchase prices that included, in many cases, a significant amount of goodwill.

 

The following pro forma summary presents the effect of the businesses acquired during 2011 and 2010 as though the businesses had been acquired as of January 1, 2010, and is based upon unaudited financial information of the acquired entities (in thousands, except per share data):

 

Three Months Ended
June 30,		      Six Months Ended
June 30,		  
     2011      2010      2011      2010  

Revenue, as reported

    $ 759,684       $ 584,681       $ 1,546,332       $ 1,188,197   

Revenue of purchased businesses for the period prior to acquisition

      15,449         116,703         40,827         237,564   
                                   

Pro forma revenue

    $ 775,133       $ 701,384       $ 1,587,159       $ 1,425,761   
                                   

Income from continuing operations, as reported

    $ 46,706       $ 37,906       $ 104,888       $ 89,889   

Net income of purchased businesses for the period prior to acquisition, including pro forma purchase accounting adjustments

      799         1,580         2,315         5,364   
                                   

Pro forma income from continuing operations

    $ 47,505       $ 39,486       $ 107,203       $ 95,253   
                                   

Basic earnings per share from continuing operations, as reported

    $ 0.32       $ 0.27       $ 0.72       $ 0.63   

Effect of purchased businesses for the period prior to acquisition

      0.01         0.01         0.02         0.04   
                                   

Pro forma basic earnings per share from continuing operations (a)

   $ 0.33       $ 0.28       $ 0.74       $ 0.67   
                                   

Diluted earnings per share from continuing operations, as reported

    $ 0.32       $ 0.26       $ 0.71       $ 0.62   

Effect of purchased businesses for the period prior to acquisition

      0.01         0.01         0.02         0.04   
                                   

Pro forma diluted earnings per share from continuing operations (a)

   $ 0.32       $ 0.27       $ 0.72       $ 0.66   
                                   

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

Unaudited pro forma supplemental information is based upon accounting estimates and judgments that we believe are reasonable. The unaudited pro forma supplemental information includes the effect of purchase accounting adjustments, such as the adjustment of inventory acquired to net realizable value, adjustments to depreciation on acquired property and equipment, adjustments to amortization on acquired intangible assets, adjustments to interest expense, and the related tax effects. These pro forma results are not necessarily indicative either of what would have occurred if the acquisitions had been in effect for the period presented or of future results.